There's No Escaping Keynote Financial Services Limited's (NSE:KEYFINSERV) Muted Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 12x, you may consider Keynote Financial Services Limited (NSE:KEYFINSERV) as a highly attractive investment with its 5.5x 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.

Keynote Financial Services has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. 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.

View our latest analysis for Keynote Financial Services

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Keynote Financial Services' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

Keynote Financial Services' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Still, lamentably EPS has fallen 31% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to shrink 3.7% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised earnings results.

In light of this, it's understandable that Keynote Financial Services' P/E sits below the majority of other companies. Nonetheless, with earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. Even just maintaining these prices will be difficult to achieve as recent earnings trends are already weighing down the shares heavily.

What We Can Learn From Keynote Financial Services' 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.

As we suspected, our examination of Keynote Financial Services revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Keynote Financial Services (of which 1 doesn't sit too well with us!) you should know about.

You might be able to find a better investment than Keynote Financial Services. 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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