There Is A Reason Bal Pharma Limited's (NSE:BALPHARMA) Price Is Undemanding

With a price-to-earnings (or "P/E") ratio of 21.7x Bal Pharma Limited (NSE:BALPHARMA) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 30x and even P/E's higher than 56x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Bal Pharma certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Bal Pharma

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Is There Any Growth For Bal Pharma?

There's an inherent assumption that a company should underperform the market for P/E ratios like Bal Pharma's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 140% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

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 can see why Bal Pharma is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Bal Pharma's 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 Bal Pharma maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Bal Pharma (1 is concerning!) that you need to take into consideration.

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

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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.