J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) Not Flying Under The Radar

With a price-to-earnings (or "P/E") ratio of 54.2x J. B. Chemicals & Pharmaceuticals Limited (NSE:JBCHEPHARM) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 30x and even P/E's lower than 17x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, J. B. Chemicals & Pharmaceuticals has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for J. B. Chemicals & Pharmaceuticals

If you'd like to see what analysts are forecasting going forward, you should check out our free report on J. B. Chemicals & Pharmaceuticals.

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 J. B. Chemicals & Pharmaceuticals' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 26%. EPS has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 24% each year over the next three years. That's shaping up to be materially higher than the 20% per year growth forecast for the broader market.

In light of this, it's understandable that J. B. Chemicals & Pharmaceuticals' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On J. B. Chemicals & Pharmaceuticals' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that J. B. Chemicals & Pharmaceuticals maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for J. B. Chemicals & Pharmaceuticals 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 low P/E.

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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.