Kirloskar Oil Engines Limited (NSE:KIRLOSENG) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Kirloskar Oil Engines Limited (NSE:KIRLOSENG) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 213% in the last year.

Since its price has surged higher, Kirloskar Oil Engines' price-to-earnings (or "P/E") ratio of 43.3x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 30x and even P/E's below 17x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Kirloskar Oil Engines certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Kirloskar Oil Engines

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kirloskar Oil Engines.

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 33% last year. Pleasingly, EPS has also lifted 126% 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 four analysts covering the company suggest earnings should grow by 18% per annum over the next three years. With the market predicted to deliver 21% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Kirloskar Oil Engines is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Kirloskar Oil Engines' P/E?

Kirloskar Oil Engines' P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Kirloskar Oil Engines' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Kirloskar Oil Engines (including 2 which don't sit too well with us).

If you're unsure about the strength of Kirloskar Oil Engines' 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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