Why We're Not Concerned About Sudarshan Chemical Industries Limited's (NSE:SUDARSCHEM) Share Price

Sudarshan Chemical Industries Limited's (NSE:SUDARSCHEM) price-to-earnings (or "P/E") ratio of 59.8x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, Sudarshan Chemical Industries' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Sudarshan Chemical Industries

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Sudarshan Chemical Industries would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. As a result, earnings from three years ago have also fallen 20% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 35% each year over the next three years. That's shaping up to be materially higher than the 20% per year growth forecast for the broader market.

In light of this, it's understandable that Sudarshan Chemical Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 Sudarshan Chemical Industries maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Sudarshan Chemical Industries that you should be aware of.

If you're unsure about the strength of Sudarshan Chemical Industries' 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.