Kellton Tech Solutions Limited (NSE:KELLTONTEC) Could Be Riskier Than It Looks

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 13x, you may consider Kellton Tech Solutions Limited (NSE:KELLTONTEC) as a highly attractive investment with its 2.6x 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 limited.

As an illustration, earnings have deteriorated at Kellton Tech Solutions over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Kellton Tech Solutions

Does Kellton Tech Solutions Have A Relatively High Or Low P/E For Its Industry?

It's plausible that Kellton Tech Solutions' particularly low P/E ratio could be a result of tendencies within its own industry. It turns out the IT industry in general also has a P/E ratio lower than the market, as the graphic below shows. So this goes some way towards explaining the company's ratio right now. Ordinarily, the majority of companies' P/E's would be compressed by the general conditions within the IT industry. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

Although there are no analyst estimates available for Kellton Tech Solutions, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kellton Tech Solutions' Growth Trending?

In order to justify its P/E ratio, Kellton Tech Solutions would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 38% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 4.8% shows it's a great look while it lasts.

In light of this, it's quite peculiar that Kellton Tech Solutions' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Kellton Tech Solutions' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Kellton Tech Solutions currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Kellton Tech Solutions that you need to take into consideration.

You might be able to find a better investment than Kellton Tech Solutions. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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