Kanani Industries Limited's (NSE:KANANIIND) P/E Is On The Mark

With a price-to-earnings (or "P/E") ratio of 24.8x Kanani Industries Limited (NSE:KANANIIND) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 12x and even P/E's lower than 6x 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 so lofty.

As an illustration, earnings have deteriorated at Kanani Industries over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Kanani Industries

Where Does Kanani Industries' P/E Sit Within Its Industry?

An inspection of average P/E's throughout Kanani Industries' industry may help to explain its particularly high P/E ratio. The image below shows that the Luxury industry as a whole has a P/E ratio lower than the market. So we'd say there is practically no merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the Luxury industry. However, what is happening on the company's own income statement is the most important factor to its P/E.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kanani Industries will help you shine a light on its historical performance.

How Is Kanani Industries' Growth Trending?

In order to justify its P/E ratio, Kanani Industries would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 20%. Still, the latest three year period has seen an excellent 194% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

In contrast to the company, the rest of the market is expected to decline by 6.7% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we can see why Kanani Industries is trading at a high P/E compared to the market. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

What We Can Learn From Kanani Industries' P/E?

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 Kanani Industries maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Kanani Industries (2 are significant!) that you need to be mindful of.

Of course, you might also be able to find a better stock than Kanani Industries. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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