Risks To Shareholder Returns Are Elevated At These Prices For Laxmi Organic Industries Limited (NSE:LXCHEM)

With a price-to-earnings (or "P/E") ratio of 53.5x Laxmi Organic Industries Limited (NSE:LXCHEM) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 22x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Laxmi Organic Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Laxmi Organic Industries

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Laxmi Organic Industries.

How Is Laxmi Organic Industries' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 87% gain to the company's bottom line. Pleasingly, EPS has also lifted 208% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 18% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 22% growth forecast for the broader market.

With this information, we find it concerning that Laxmi Organic Industries is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Key Takeaway

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.

Our examination of Laxmi Organic Industries' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Laxmi Organic Industries with six simple checks.

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 P/E ratio below 20x).

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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.