Sumitomo Chemical India Limited's (NSE:SUMICHEM) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 52.8x Sumitomo Chemical India Limited (NSE:SUMICHEM) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Sumitomo Chemical India as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sumitomo Chemical India

Want the full picture on analyst estimates for the company? Then our free report on Sumitomo Chemical India will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/E as steep as Sumitomo Chemical India's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the six analysts watching the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Sumitomo Chemical India's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Sumitomo Chemical India's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Sumitomo Chemical India with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Sumitomo Chemical India. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.