There's Reason For Concern Over Supreme Petrochem Limited's (NSE:SPLPETRO) Price

It's not a stretch to say that Supreme Petrochem Limited's (NSE:SPLPETRO) price-to-earnings (or "P/E") ratio of 27.7x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's inferior to most other companies of late, Supreme Petrochem has been relatively sluggish. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Supreme Petrochem's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. However, this wasn't enough as the latest three year period has seen an unpleasant 38% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 22% over the next year. Meanwhile, the rest of the market is forecast to expand by 25%, which is noticeably more attractive.

In light of this, it's curious that Supreme Petrochem's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Supreme Petrochem's 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.

We've established that Supreme Petrochem currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Supreme Petrochem you should be aware of.

If these risks are making you reconsider your opinion on Supreme Petrochem, 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.