Sharda Cropchem Limited (NSE:SHARDACROP) Stock's 26% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Sharda Cropchem Limited (NSE:SHARDACROP) share price has fared very poorly over the last month, falling by a substantial 26%. Looking at the bigger picture, even after this poor month the stock is up 47% in the last year.

In spite of the heavy fall in price, Sharda Cropchem may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.7x, since almost half of all companies in India have P/E ratios greater than 29x and even P/E's higher than 55x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Sharda Cropchem certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Sharda Cropchem

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sharda Cropchem.

How Is Sharda Cropchem's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sharda Cropchem's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 180% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 40% during the coming year according to the five analysts following the company. That's shaping up to be materially higher than the 26% growth forecast for the broader market.

With this information, we find it odd that Sharda Cropchem is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Sharda Cropchem's P/E

Sharda Cropchem's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sharda Cropchem currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Sharda Cropchem is showing 1 warning sign in our investment analysis, 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.