The Market Doesn't Like What It Sees From Chambal Fertilisers and Chemicals Limited's (NSE:CHAMBLFERT) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 11.1x Chambal Fertilisers and Chemicals Limited (NSE:CHAMBLFERT) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 53x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Recent times have been advantageous for Chambal Fertilisers and Chemicals as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Chambal Fertilisers and Chemicals' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. As a result, it also grew EPS by 19% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 1.7% per year during the coming three years according to the dual analysts following the company. That's not great when the rest of the market is expected to grow by 19% per year.

In light of this, it's understandable that Chambal Fertilisers and Chemicals' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Chambal Fertilisers and Chemicals' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Chambal Fertilisers and Chemicals (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Chambal Fertilisers and Chemicals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.