Kirloskar Oil Engines Limited's (NSE:KIRLOSENG) Shares Bounce 28% But Its Business Still Trails The Market

Kirloskar Oil Engines Limited (NSE:KIRLOSENG) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 14% in the last twelve months.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 26x, you may still consider Kirloskar Oil Engines as an attractive investment with its 21.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for Kirloskar Oil Engines as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Kirloskar Oil Engines

Keen to find out how analysts think Kirloskar Oil Engines' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kirloskar Oil Engines' Growth Trending?

Kirloskar Oil Engines' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. The strong recent performance means it was also able to grow EPS by 176% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 0.8% during the coming year according to the four analysts following the company. With the market predicted to deliver 25% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Kirloskar Oil Engines is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Kirloskar Oil Engines' P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Kirloskar Oil Engines' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Kirloskar Oil Engines is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

You might be able to find a better investment than Kirloskar Oil Engines. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.