What Tainwala Chemicals and Plastics (India) Limited's (NSE:TAINWALCHM) 40% Share Price Gain Is Not Telling You

The Tainwala Chemicals and Plastics (India) Limited (NSE:TAINWALCHM) share price has done very well over the last month, posting an excellent gain of 40%. The annual gain comes to 113% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Tainwala Chemicals and Plastics (India) may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 48.8x, since 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 high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Tainwala Chemicals and Plastics (India) as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Tainwala Chemicals and Plastics (India)

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tainwala Chemicals and Plastics (India)'s earnings, revenue and cash flow.

Is There Enough Growth For Tainwala Chemicals and Plastics (India)?

In order to justify its P/E ratio, Tainwala Chemicals and Plastics (India) would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Tainwala Chemicals and Plastics (India) is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Tainwala Chemicals and Plastics (India)'s P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Tainwala Chemicals and Plastics (India) revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Tainwala Chemicals and Plastics (India) you should know about.

If you're unsure about the strength of Tainwala Chemicals and Plastics (India)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.