KPIT Technologies Limited (NSE:KPITTECH) shareholders that were waiting for something to happen have been dealt a blow with a 27% 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 36% share price drop.
In spite of the heavy fall in price, KPIT Technologies may still be sending bearish signals at the moment with its price-to-earnings (or “P/E”) ratio of 32.6x, since almost half of all companies in India have P/E ratios under 23x and even P/E’s lower than 13x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s as high as it is.
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KPIT Technologies could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
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Does Growth Match The High P/E?
In order to justify its P/E ratio, KPIT Technologies would need to produce impressive growth in excess of the market.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 5.5%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 105% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Looking ahead now, EPS is anticipated to climb by 19% each year during the coming three years according to the analysts following the company. That’s shaping up to be similar to the 20% each year growth forecast for the broader market.
In light of this, it’s curious that KPIT Technologies’ P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Bottom Line On KPIT Technologies’ P/E
There’s still some solid strength behind KPIT Technologies’ P/E, if not its share price lately. 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.
We’ve established that KPIT Technologies currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.
Plus, you should also learn about this 1 warning sign we’ve spotted with KPIT Technologies.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.
