Market Still Lacking Some Conviction On Chembond Material Technologies Limited (NSE:CHEMBOND)

With a price-to-earnings (or "P/E") ratio of 15x Chembond Material Technologies Limited (NSE:CHEMBOND) may be sending 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 54x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Chembond Material Technologies over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

Check out our latest analysis for Chembond Material Technologies

Although there are no analyst estimates available for Chembond Material Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as low as Chembond Material Technologies' is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 61%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 117% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Chembond Material Technologies' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Chembond Material Technologies' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Chembond Material Technologies revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Chembond Material Technologies that you should be aware of.

You might be able to find a better investment than Chembond Material Technologies. 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.