Getting In Cheap On Biofil Chemicals and Pharmaceuticals Limited (NSE:BIOFILCHEM) Is Unlikely

Biofil Chemicals and Pharmaceuticals Limited's (NSE:BIOFILCHEM) price-to-earnings (or "P/E") ratio of 21.4x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Biofil Chemicals and Pharmaceuticals as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Biofil Chemicals and Pharmaceuticals

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Biofil Chemicals and Pharmaceuticals' earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 156% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 31% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

This is in contrast to the rest of the market, which is expected to decline by 5.9% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's odd that Biofil Chemicals and Pharmaceuticals' P/E sits above the majority of other companies. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Key Takeaway

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 Biofil Chemicals and Pharmaceuticals currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. When we see below average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Biofil Chemicals and Pharmaceuticals is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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