Earnings Not Telling The Story For Pondy Oxides And Chemicals Limited (NSE:POCL) After Shares Rise 25%

Pondy Oxides And Chemicals Limited (NSE:POCL) shares have continued their recent momentum with a 25% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

Following the firm bounce in price, Pondy Oxides And Chemicals may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.1x, since almost half of all companies in India have P/E ratios under 28x and even P/E's lower than 16x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Pondy Oxides And Chemicals 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.

View our latest analysis for Pondy Oxides And Chemicals

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

Does Growth Match The High P/E?

Pondy Oxides And Chemicals' 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.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. As a result, it also grew EPS by 13% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Pondy Oxides And Chemicals is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Pondy Oxides And Chemicals' P/E?

Shares in Pondy Oxides And Chemicals have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Pondy Oxides And Chemicals currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Pondy Oxides And Chemicals (at least 1 which is concerning), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Pondy Oxides And Chemicals. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.