Punjab Chemicals and Crop Protection Limited's (NSE:PUNJABCHEM) Popularity With Investors Under Threat As Stock Sinks 28%

The Punjab Chemicals and Crop Protection Limited (NSE:PUNJABCHEM) share price has fared very poorly over the last month, falling by a substantial 28%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 35% in that time.

Even after such a large drop in price, it's still not a stretch to say that Punjab Chemicals and Crop Protection's price-to-earnings (or "P/E") ratio of 25.8x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 27x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Punjab Chemicals and Crop Protection's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Punjab Chemicals and Crop Protection

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

Is There Some Growth For Punjab Chemicals and Crop Protection?

There's an inherent assumption that a company should be matching the market for P/E ratios like Punjab Chemicals and Crop Protection's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. The last three years don't look nice either as the company has shrunk EPS by 54% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Punjab Chemicals and Crop Protection's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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 the recent negative growth rates.

What We Can Learn From Punjab Chemicals and Crop Protection's P/E?

Following Punjab Chemicals and Crop Protection's share price tumble, its P/E is now hanging on to the median market P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Punjab Chemicals and Crop Protection revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Punjab Chemicals and Crop Protection that you should be aware of.

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.