Some Confidence Is Lacking In KEI Industries Limited's (NSE:KEI) P/E

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may consider KEI Industries Limited (NSE:KEI) as a stock to avoid entirely with its 65.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for KEI Industries has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, KEI Industries would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. Pleasingly, EPS has also lifted 91% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 20% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.

In light of this, it's curious that KEI Industries' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that KEI Industries currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for KEI Industries that you should be aware of.

If these risks are making you reconsider your opinion on KEI Industries, 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.