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Wall Street JournalInvestors Don't See Light At End Of Aarti Drugs Limited's (NSE:AARTIDRUGS) Tunnel And Push Stock Down 25%
Aarti Drugs Limited (NSE:AARTIDRUGS) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 14% share price drop.
After such a large drop in price, Aarti Drugs may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.9x, since almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 49x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Recent times have been advantageous for Aarti Drugs as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Check out our latest analysis for Aarti Drugs
Is There Any Growth For Aarti Drugs?
The only time you'd be truly comfortable seeing a P/E as low as Aarti Drugs' is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. As a result, it also grew EPS by 7.9% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the lone analyst following the company. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.
With this information, we can see why Aarti Drugs is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Final Word
Aarti Drugs' recently weak share price has pulled its P/E below most other companies. 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 Aarti Drugs maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Aarti Drugs with six simple checks will allow you to discover any risks that could be an issue.
If these risks are making you reconsider your opinion on Aarti Drugs, 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.