Earnings Not Telling The Story For Gujarat Fluorochemicals Limited (NSE:FLUOROCHEM) After Shares Rise 26%

Gujarat Fluorochemicals Limited (NSE:FLUOROCHEM) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Following the firm bounce in price, Gujarat Fluorochemicals' price-to-earnings (or "P/E") ratio of 43.3x 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 29x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Gujarat Fluorochemicals' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Gujarat Fluorochemicals

Keen to find out how analysts think Gujarat Fluorochemicals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Gujarat Fluorochemicals?

The only time you'd be truly comfortable seeing a P/E as high as Gujarat Fluorochemicals' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 315% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the eleven analysts following the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's alarming that Gujarat Fluorochemicals' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Gujarat Fluorochemicals' P/E?

The large bounce in Gujarat Fluorochemicals' shares has lifted the company's P/E to a fairly high level. 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 Gujarat Fluorochemicals currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Gujarat Fluorochemicals with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.