Kennametal India Limited (NSE:KENNAMET) P/E Isn't Throwing Up Surprises

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 12x, you may consider Kennametal India Limited (NSE:KENNAMET) as a stock to avoid entirely with its 25.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Kennametal India over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Kennametal India

Although there are no analyst estimates available for Kennametal India, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 128% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to shrink 6.7% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we can see why Kennametal India is trading at a high P/E compared to the market. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Key Takeaway

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 Kennametal India maintains its high P/E on the strength of its recentthree-year growth beating forecasts for a struggling market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader market turmoil. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Kennametal India with six simple checks on some of these key factors.

If you're unsure about the strength of Kennametal India's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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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