Optimistic Investors Push The Fertilisers And Chemicals Travancore Limited (NSE:FACT) Shares Up 25% But Growth Is Lacking

The Fertilisers And Chemicals Travancore Limited (NSE:FACT) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 232% in the last year.

Since its price has surged higher, Fertilisers And Chemicals Travancore's price-to-earnings (or "P/E") ratio of 25.1x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 17x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Fertilisers And Chemicals Travancore's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Fertilisers And Chemicals Travancore

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How Is Fertilisers And Chemicals Travancore's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Fertilisers And Chemicals Travancore's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 69%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 29% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Fertilisers And Chemicals Travancore's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Fertilisers And Chemicals Travancore's P/E

Fertilisers And Chemicals Travancore shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Fertilisers And Chemicals Travancore revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 4 warning signs for Fertilisers And Chemicals Travancore (2 shouldn't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Fertilisers And Chemicals Travancore's 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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