What Rashtriya Chemicals and Fertilizers Limited's (NSE:RCF) P/E Is Not Telling You

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider Rashtriya Chemicals and Fertilizers Limited (NSE:RCF) as a stock to potentially avoid with its 39.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Rashtriya Chemicals and Fertilizers' 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.

View our latest analysis for Rashtriya Chemicals and Fertilizers

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

How Is Rashtriya Chemicals and Fertilizers' Growth Trending?

In order to justify its P/E ratio, Rashtriya Chemicals and Fertilizers would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. The last three years don't look nice either as the company has shrunk EPS by 66% 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 alarming that Rashtriya Chemicals and Fertilizers' 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Rashtriya Chemicals and Fertilizers' P/E

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.

We've established that Rashtriya Chemicals and Fertilizers currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Rashtriya Chemicals and Fertilizers you should know about.

If these risks are making you reconsider your opinion on Rashtriya Chemicals and Fertilizers, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.