There's Reason For Concern Over Pondy Oxides And Chemicals Limited's (NSE:POCL) Massive 37% Price Jump

Pondy Oxides And Chemicals Limited (NSE:POCL) shares have continued their recent momentum with a 37% gain in the last month alone. The last month tops off a massive increase of 210% in the last year.

Following the firm bounce in price, Pondy Oxides And Chemicals' price-to-earnings (or "P/E") ratio of 45.5x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. 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.

As an illustration, earnings have deteriorated at Pondy Oxides And Chemicals over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Pondy Oxides And Chemicals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Pondy Oxides And Chemicals will help you shine a light on its historical performance.

How Is Pondy Oxides And Chemicals' Growth Trending?

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.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 42%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 101% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

It's interesting to note that the rest of the market is similarly expected to grow by 26% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Pondy Oxides And Chemicals is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

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

Pondy Oxides And Chemicals' P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Pondy Oxides And Chemicals revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Pondy Oxides And Chemicals (of which 1 is a bit concerning!) you should know about.

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.