There's Reason For Concern Over Sumitomo Chemical India Limited's (NSE:SUMICHEM) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 25x, you may consider Sumitomo Chemical India Limited (NSE:SUMICHEM) as a stock to avoid entirely with its 54.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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With earnings growth that's superior to most other companies of late, Sumitomo Chemical India has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sumitomo Chemical India

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sumitomo Chemical India.

How Is Sumitomo Chemical India's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 55%. As a result, it also grew EPS by 28% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

In light of this, it's alarming that Sumitomo Chemical India's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

Our examination of Sumitomo Chemical India's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Sumitomo Chemical India with six simple checks.

If these risks are making you reconsider your opinion on Sumitomo Chemical India, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.