Why Investors Shouldn't Be Surprised By Himadri Speciality Chemical Limited's (NSE:HSCL) 29% Share Price Surge

Himadri Speciality Chemical Limited (NSE:HSCL) shares have continued their recent momentum with a 29% gain in the last month alone. The last month tops off a massive increase of 176% in the last year.

After such a large jump in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 33x, you may consider Himadri Speciality Chemical as a stock to avoid entirely with its 58.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Himadri Speciality Chemical has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Himadri Speciality Chemical

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

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

Himadri Speciality Chemical's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 55%. The latest three year period has also seen an excellent 410% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Himadri Speciality Chemical's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Shares in Himadri Speciality Chemical have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Himadri Speciality Chemical maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Himadri Speciality Chemical that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.