Investors Appear Satisfied With Supreme Petrochem Limited's (NSE:SPLPETRO) Prospects

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider Supreme Petrochem Limited (NSE:SPLPETRO) as a stock to potentially avoid with its 39.2x P/E ratio. 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.

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Supreme Petrochem hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Supreme Petrochem

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Supreme Petrochem's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 50% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 50% as estimated by the two analysts watching the company. With the market only predicted to deliver 25%, the company is positioned for a stronger earnings result.

With this information, we can see why Supreme Petrochem is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Supreme Petrochem's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Supreme Petrochem's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Supreme Petrochem is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Supreme Petrochem's 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.