Some Confidence Is Lacking In Kewal Kiran Clothing Limited's (NSE:KKCL) P/E

With a median price-to-earnings (or "P/E") ratio of close to 13x in India, you could be forgiven for feeling indifferent about Kewal Kiran Clothing Limited's (NSE:KKCL) P/E ratio of 12.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, Kewal Kiran Clothing's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Kewal Kiran Clothing's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 9.0% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 2.0% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company are not good at all, suggesting earnings should decline by 31% over the next year. With the rest of the market predicted to shrink by 5.2%, it's a sub-optimal result.

With this information, it's perhaps strange that Kewal Kiran Clothing is trading at a fairly similar P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Final Word

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.

Our examination of Kewal Kiran Clothing's analyst forecasts revealed that its even shakier outlook against the market isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook, we suspect the share price is at risk of declining, sending the moderate P/E lower. We're also cautious about the company's ability to resist even greater pain to its business from the broader market turmoil. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Kewal Kiran Clothing, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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