Optimistic Investors Push Kolte-Patil Developers Limited (NSE:KOLTEPATIL) Shares Up 34% But Growth Is Lacking

Kolte-Patil Developers Limited (NSE:KOLTEPATIL) shares have had a really impressive month, gaining 34% after a shaky period beforehand. The last month tops off a massive increase of 120% in the last year.

Following the firm bounce in price, Kolte-Patil Developers' price-to-earnings (or "P/E") ratio of 57.7x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 31x and even P/E's below 17x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Kolte-Patil Developers certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for Kolte-Patil Developers

Keen to find out how analysts think Kolte-Patil Developers' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Kolte-Patil Developers' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 494%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 18% over the next year. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Kolte-Patil Developers' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Shares in Kolte-Patil Developers have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kolte-Patil Developers currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Kolte-Patil Developers (of which 1 can't be ignored!) you should know about.

If you're unsure about the strength of Kolte-Patil Developers' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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