India Pesticides Limited (NSE:IPL) Stock Rockets 48% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, India Pesticides Limited (NSE:IPL) shares have been powering on, with a gain of 48% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.1% over the last year.

In spite of the firm bounce in price, there still wouldn't be many who think India Pesticides' price-to-earnings (or "P/E") ratio of 29.2x is worth a mention when the median P/E in India is similar at about 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Recent times have been quite advantageous for India Pesticides as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for India Pesticides

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on India Pesticides' earnings, revenue and cash flow.

How Is India Pesticides' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like India Pesticides' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 48% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

In light of this, it's somewhat alarming that India Pesticides' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Bottom Line On India Pesticides' P/E

India Pesticides appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of India Pesticides 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. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for India Pesticides (1 is potentially serious!) that we have uncovered.

Of course, you might also be able to find a better stock than India Pesticides. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.