Optimistic Investors Push Bafna Pharmaceuticals Limited (NSE:BAFNAPH) Shares Up 27% But Growth Is Lacking

The Bafna Pharmaceuticals Limited (NSE:BAFNAPH) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 49%.

Since its price has surged higher, Bafna Pharmaceuticals may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 46.5x, since almost half of all companies in India have P/E ratios under 21x and even P/E's lower than 11x 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.

For example, consider that Bafna Pharmaceuticals' financial performance has been poor lately as it's earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Bafna Pharmaceuticals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Bafna Pharmaceuticals will help you shine a light on its historical performance.

How Is Bafna Pharmaceuticals' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Bafna Pharmaceuticals' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Bafna Pharmaceuticals 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Shares in Bafna Pharmaceuticals have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Bafna Pharmaceuticals currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Bafna Pharmaceuticals, and understanding these should be part of your investment process.

You might be able to find a better investment than Bafna Pharmaceuticals. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.