Stock Analysis

Subdued Growth No Barrier To Alembic Pharmaceuticals Limited (NSE:APLLTD) With Shares Advancing 25%

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Alembic Pharmaceuticals Limited (NSE:APLLTD) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 70% in the last year.

Since its price has surged higher, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Alembic Pharmaceuticals as a stock to potentially avoid with its 34.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been advantageous for Alembic Pharmaceuticals 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Alembic Pharmaceuticals

NSEI:APLLTD Price to Earnings Ratio vs Industry January 21st 2024
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Does Growth Match The High P/E?

Alembic Pharmaceuticals' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 100% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 53% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the analysts watching the company. With the market predicted to deliver 19% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Alembic Pharmaceuticals is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Alembic Pharmaceuticals' P/E?

The large bounce in Alembic Pharmaceuticals' shares has lifted the company's P/E to a fairly high level. 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.

We've established that Alembic Pharmaceuticals currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Alembic Pharmaceuticals you should know about.

If these risks are making you reconsider your opinion on Alembic Pharmaceuticals, explore our interactive list of high quality stocks to get an idea of what else is out there.

Valuation is complex, but we're helping make it simple.

Find out whether Alembic Pharmaceuticals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.