Earnings Not Telling The Story For The Sukhjit Starch & Chemicals Limited (NSE:SUKHJITS) After Shares Rise 26%
The Sukhjit Starch & Chemicals Limited (NSE:SUKHJITS) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about Sukhjit Starch & Chemicals' P/E ratio of 25.4x, since the median price-to-earnings (or "P/E") ratio in India is also close to 26x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
As an illustration, earnings have deteriorated at Sukhjit Starch & Chemicals over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Sukhjit Starch & Chemicals
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Sukhjit Starch & Chemicals' to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 59%. This means it has also seen a slide in earnings over the longer-term as EPS is down 71% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's somewhat alarming that Sukhjit Starch & Chemicals' P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Sukhjit Starch & Chemicals' P/E
Sukhjit Starch & Chemicals' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Sukhjit Starch & Chemicals revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 4 warning signs for Sukhjit Starch & Chemicals (1 can't be ignored!) that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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