Market Participants Recognise Acutaas Chemicals Limited's (NSE:ACUTAAS) Earnings Pushing Shares 27% Higher

Acutaas Chemicals Limited (NSE:ACUTAAS) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 115% in the last year.

Following the firm bounce in price, Acutaas Chemicals may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 63.3x, since almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Recent times have been advantageous for Acutaas Chemicals as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Acutaas Chemicals

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 112% gain to the company's bottom line. Pleasingly, EPS has also lifted 150% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 39% per annum over the next three years. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Acutaas Chemicals' 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

The strong share price surge has got Acutaas Chemicals' P/E rushing to great heights as well. 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.

We've established that Acutaas Chemicals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Acutaas Chemicals that you should be aware of.

If you're unsure about the strength of Acutaas Chemicals' 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.