Privi Speciality Chemicals Limited (NSE:PRIVISCL) Looks Just Right With A 28% Price Jump

Privi Speciality Chemicals Limited (NSE:PRIVISCL) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 29%.

After such a large jump in price, Privi Speciality Chemicals may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58.3x, since almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Privi Speciality Chemicals certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Privi Speciality Chemicals

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How Is Privi Speciality Chemicals' Growth Trending?

In order to justify its P/E ratio, Privi Speciality Chemicals would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 330% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 19% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 37% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 25%, which is noticeably less attractive.

In light of this, it's understandable that Privi Speciality Chemicals' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Privi Speciality Chemicals' P/E?

Privi Speciality Chemicals' P/E is flying high just like its stock has during the last month. 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.

We've established that Privi Speciality Chemicals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Privi Speciality Chemicals you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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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