Kelsian Group Limited (ASX:KLS) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Kelsian Group Limited (ASX:KLS) shares have continued their recent momentum with a 30% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 38%.

After such a large jump in price, given around half the companies in Australia have price-to-earnings ratios (or "P/E's") below 19x, you may consider Kelsian Group as a stock to potentially avoid with its 25.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Kelsian Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Kelsian Group

Want the full picture on analyst estimates for the company? Then our free report on Kelsian Group will help you uncover what's on the horizon.

Is There Enough Growth For Kelsian Group?

In order to justify its P/E ratio, Kelsian Group would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.3%. As a result, earnings from three years ago have also fallen 17% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 16% each year during the coming three years according to the nine analysts following the company. That's shaping up to be similar to the 15% per year growth forecast for the broader market.

In light of this, it's curious that Kelsian Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Kelsian Group's P/E

Kelsian Group's P/E is getting right up there since its shares have risen strongly. 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 Kelsian Group currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Kelsian Group you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.