The Market Doesn't Like What It Sees From Par Drugs and Chemicals Limited's (NSE:PAR) Earnings Yet As Shares Tumble 26%

To the annoyance of some shareholders, Par Drugs and Chemicals Limited (NSE:PAR) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.

Following the heavy fall in price, Par Drugs and Chemicals may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 11.3x, since 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 quite low for a reason and it requires further investigation to determine if it's justified.

Par Drugs and Chemicals has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Par Drugs and Chemicals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Par Drugs and Chemicals will help you shine a light on its historical performance.

Is There Any Growth For Par Drugs and Chemicals?

The only time you'd be truly comfortable seeing a P/E as depressed as Par Drugs and Chemicals' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a decent 8.4% gain to the company's bottom line. Pleasingly, EPS has also lifted 38% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Par Drugs and Chemicals is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Par Drugs and Chemicals' P/E?

Having almost fallen off a cliff, Par Drugs and Chemicals' share price has pulled its P/E way down as well. 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 Par Drugs and Chemicals revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Par Drugs and Chemicals (of which 1 can't be ignored!) you should know about.

If you're unsure about the strength of Par Drugs and Chemicals' 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.