Why Investors Shouldn't Be Surprised By Chambal Fertilisers and Chemicals Limited's (NSE:CHAMBLFERT) Low P/E

With a price-to-earnings (or "P/E") ratio of 13.4x 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 30x and even P/E's higher than 57x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Chambal Fertilisers and Chemicals has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Chambal Fertilisers and Chemicals?

The only time you'd be truly comfortable seeing a P/E as depressed as Chambal Fertilisers and Chemicals' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. As a result, it also grew EPS by 9.4% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 1.3% per year over the next three years. Meanwhile, the broader market is forecast to expand by 22% per annum, which paints a poor picture.

With this information, we are not surprised that Chambal Fertilisers and Chemicals is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Chambal Fertilisers and Chemicals' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Chambal Fertilisers and Chemicals maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

You always need to take note of risks, for example - Chambal Fertilisers and Chemicals has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Chambal Fertilisers and Chemicals. 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.