Sentiment Still Eluding IOL Chemicals and Pharmaceuticals Limited (NSE:IOLCP)

With a price-to-earnings (or "P/E") ratio of 20.1x 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 27x and even P/E's higher than 51x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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While the market has experienced earnings growth lately, IOL Chemicals and Pharmaceuticals' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. 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.

Check out our latest analysis for IOL Chemicals and Pharmaceuticals

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Is There Any Growth For IOL Chemicals and Pharmaceuticals?

IOL Chemicals and Pharmaceuticals' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 54% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 61% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 25% growth forecast for the broader market.

In light of this, it's peculiar that IOL Chemicals and Pharmaceuticals' P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that IOL Chemicals and Pharmaceuticals currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for IOL Chemicals and Pharmaceuticals you should know about.

If you're unsure about the strength of IOL Chemicals and Pharmaceuticals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.