Some Caplin Point Laboratories Limited (NSE:CAPLIPOINT) Shareholders Look For Exit As Shares Take 27% Pounding

The Caplin Point Laboratories Limited (NSE:CAPLIPOINT) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 34% in the last year.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Caplin Point Laboratories' P/E ratio of 29.2x, since the median price-to-earnings (or "P/E") ratio in India is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for Caplin Point Laboratories as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Caplin Point Laboratories

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Caplin Point Laboratories.

Does Growth Match The P/E?

In order to justify its P/E ratio, Caplin Point Laboratories would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 78% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

With this information, we find it interesting that Caplin Point Laboratories is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

With its share price falling into a hole, the P/E for Caplin Point Laboratories looks quite average now. 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 Caplin Point Laboratories currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Caplin Point Laboratories with six simple checks.

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 low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.