Pondy Oxides And Chemicals Limited (NSE:POCL) Shares May Have Slumped 27% But Getting In Cheap Is Still Unlikely

Unfortunately for some shareholders, the Pondy Oxides And Chemicals Limited (NSE:POCL) share price has dived 27% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 60% in the last year.

Even after such a large drop in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may still consider Pondy Oxides And Chemicals as a stock to potentially avoid with its 30.3x 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 as high as it is.

For example, consider that Pondy Oxides And Chemicals' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Pondy Oxides And Chemicals

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Pondy Oxides And Chemicals' earnings, revenue and cash flow.

Is There Enough Growth For Pondy Oxides And Chemicals?

Pondy Oxides And Chemicals' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

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.

In light of this, it's alarming that Pondy Oxides And Chemicals' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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?

There's still some solid strength behind Pondy Oxides And Chemicals' P/E, if not its share price lately. 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 Pondy Oxides And Chemicals revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Pondy Oxides And Chemicals that you should be aware of.

If you're unsure about the strength of Pondy Oxides And 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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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.