Tatva Chintan Pharma Chem Limited's (NSE:TATVA) Share Price Matching Investor Opinion

With a price-to-earnings (or "P/E") ratio of 75.6x Tatva Chintan Pharma Chem Limited (NSE:TATVA) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Tatva Chintan Pharma Chem could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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 Tatva Chintan Pharma Chem

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Is There Enough Growth For Tatva Chintan Pharma Chem?

In order to justify its P/E ratio, Tatva Chintan Pharma Chem would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 38% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 94% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 24% growth forecast for the broader market.

In light of this, it's understandable that Tatva Chintan Pharma Chem's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Tatva Chintan Pharma Chem'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.

As we suspected, our examination of Tatva Chintan Pharma Chem's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Plus, you should also learn about this 1 warning sign we've spotted with Tatva Chintan Pharma Chem.

Of course, you might also be able to find a better stock than Tatva Chintan Pharma Chem. 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.