BASF India Limited (NSE:BASF) Shares May Have Slumped 26% But Getting In Cheap Is Still Unlikely

BASF India Limited (NSE:BASF) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 88%, which is great even in a bull market.

Although its price has dipped substantially, BASF India may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.5x, since almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

BASF India certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BASF India

If you'd like to see what analysts are forecasting going forward, you should check out our free report on BASF India.

Is There Enough Growth For BASF India?

BASF India's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 83% gain to the company's bottom line. As a result, it also grew EPS by 29% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the one analyst watching the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that BASF India's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On BASF India's P/E

Despite the recent share price weakness, BASF India's P/E remains higher than most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that BASF India currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for BASF India that you should be aware of.

You might be able to find a better investment than BASF India. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.