A Piece Of The Puzzle Missing From IOL Chemicals and Pharmaceuticals Limited's (NSE:IOLCP) Share Price

With a price-to-earnings (or "P/E") ratio of 24x IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 65x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

IOL Chemicals and Pharmaceuticals hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

View our latest analysis for IOL Chemicals and Pharmaceuticals

Keen to find out how analysts think IOL Chemicals and Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For IOL Chemicals and Pharmaceuticals?

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

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 69% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 23% each year over the next three years. With the market only predicted to deliver 20% each year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that IOL Chemicals and Pharmaceuticals' P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

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.

Our examination of IOL Chemicals and Pharmaceuticals' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for IOL Chemicals and Pharmaceuticals that you need to be mindful of.

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

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.