Lords Chloro Alkali Limited (NSE:LORDSCHLO) Could Be Riskier Than It Looks

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 28x, you may consider Lords Chloro Alkali Limited (NSE:LORDSCHLO) as a highly attractive investment with its 6.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Lords Chloro Alkali has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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.

See our latest analysis for Lords Chloro Alkali

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

How Is Lords Chloro Alkali's Growth Trending?

In order to justify its P/E ratio, Lords Chloro Alkali would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 321% gain to the company's bottom line. The latest three year period has also seen an excellent 313% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 26% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Lords Chloro Alkali is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

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 Lords Chloro Alkali 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. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 2 warning signs for Lords Chloro Alkali (1 makes us a bit uncomfortable!) that you need to take into consideration.

You might be able to find a better investment than Lords Chloro Alkali. 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.