Take Care Before Jumping Onto Kelsian Group Limited (ASX:KLS) Even Though It's 27% Cheaper

Kelsian Group Limited (ASX:KLS) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 42% in that time.

Although its price has dipped substantially, given about half the companies in Australia have price-to-earnings ratios (or "P/E's") above 20x, you may still consider Kelsian Group as an attractive investment with its 17.1x 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 limited.

With earnings growth that's superior to most other companies of late, Kelsian Group has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Kelsian Group?

In order to justify its P/E ratio, Kelsian Group would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 137% gain to the company's bottom line. EPS has also lifted 24% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 18% each year during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 18% per year, which is not materially different.

In light of this, it's peculiar that Kelsian Group's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

Kelsian Group's recently weak share price has pulled its P/E below most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kelsian Group currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Kelsian Group (1 shouldn't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on Kelsian Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.