What Heubach Colorants India Limited's (NSE:HEUBACHIND) 26% Share Price Gain Is Not Telling You

Heubach Colorants India Limited (NSE:HEUBACHIND) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

Following the firm bounce in price, Heubach Colorants India's price-to-earnings (or "P/E") ratio of 51x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Heubach Colorants India has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Heubach Colorants India

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Heubach Colorants India will help you shine a light on its historical performance.

Is There Enough Growth For Heubach Colorants India?

The only time you'd be truly comfortable seeing a P/E as steep as Heubach Colorants India's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. Still, incredibly EPS has fallen 87% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's alarming that Heubach Colorants India's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Heubach Colorants India's P/E?

The strong share price surge has got Heubach Colorants India's P/E rushing to great heights as well. 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 Heubach Colorants India revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Heubach Colorants India (1 is significant) you should be aware of.

You might be able to find a better investment than Heubach Colorants India. 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.