Insufficient Growth At Oriental Carbon & Chemicals Limited (NSE:OCCL) Hampers Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 19x, you may consider Oriental Carbon & Chemicals Limited (NSE:OCCL) as an attractive investment with its 13.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For instance, Oriental Carbon & Chemicals' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

View our latest analysis for Oriental Carbon & Chemicals

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

In order to justify its P/E ratio, Oriental Carbon & Chemicals would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 11%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 29% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Oriental Carbon & Chemicals is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Oriental Carbon & Chemicals' P/E

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.

As we suspected, our examination of Oriental Carbon & Chemicals revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Oriental Carbon & Chemicals that you need to be mindful of.

If you're unsure about the strength of Oriental Carbon & Chemicals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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