Little Excitement Around Oriental Carbon & Chemicals Limited's (NSE:OCCL) Earnings As Shares Take 68% Pounding

Oriental Carbon & Chemicals Limited (NSE:OCCL) shareholders that were waiting for something to happen have been dealt a blow with a 68% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 73% share price decline.

After such a large drop in price, Oriental Carbon & Chemicals' price-to-earnings (or "P/E") ratio of 4.5x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 33x and even P/E's above 65x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Oriental Carbon & Chemicals could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Oriental Carbon & Chemicals

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Oriental Carbon & Chemicals.

How Is Oriental Carbon & Chemicals' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.1%. As a result, earnings from three years ago have also fallen 42% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 25% over the next year. That's not great when the rest of the market is expected to grow by 25%.

With this information, we are not surprised that Oriental Carbon & Chemicals is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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

Shares in Oriental Carbon & Chemicals have plummeted and its P/E is now low enough to touch the ground. 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' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Oriental Carbon & Chemicals has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.

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