Dishman Carbogen Amcis Limited's (NSE:DCAL) Price In Tune With Earnings

Dishman Carbogen Amcis Limited's (NSE:DCAL) price-to-earnings (or "P/E") ratio of 15.6x might make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Dishman Carbogen Amcis hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Dishman Carbogen Amcis

Does Dishman Carbogen Amcis Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Dishman Carbogen Amcis' industry may help to explain its high P/E ratio. The image below shows that the Life Sciences industry as a whole has a P/E ratio significantly higher than the market. So we'd say there could be some merit in the premise that the company's ratio being shaped by its industry at this time. Some industry P/E's don't move around a lot and right now most companies within the Life Sciences industry should be getting a strong boost. However, what is happening on the company's own income statement is the most important factor to its P/E.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dishman Carbogen Amcis.

How Is Dishman Carbogen Amcis' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 1.3% as estimated by the three analysts watching the company. Meanwhile, the market is forecast to moderate by 5.2%, which indicates the company should perform better regardless.

In light of this, it's understandable that Dishman Carbogen Amcis' P/E sits above the majority of other companies. However, even though the company may outperform the market, shrinking earnings are unlikely to make the P/E premium sustainable long-term. There is still potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Dishman Carbogen Amcis' analyst forecasts revealed that its less shaky outlook against the market is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under any additional threat. We still remain cautious about the company's ability to keep resisting the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future under the current growth expectations.

Before you settle on your opinion, we've discovered 1 warning sign for Dishman Carbogen Amcis that you should be aware of.

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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