Kirloskar Pneumatic Company Limited's (NSE:KIRLPNU) 33% Jump Shows Its Popularity With Investors

Kirloskar Pneumatic Company Limited (NSE:KIRLPNU) shares have continued their recent momentum with a 33% gain in the last month alone. The last month tops off a massive increase of 110% in the last year.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Kirloskar Pneumatic as a stock to avoid entirely with its 68.4x 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.

There hasn't been much to differentiate Kirloskar Pneumatic's and the market's earnings growth lately. 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.

View our latest analysis for Kirloskar Pneumatic

Want the full picture on analyst estimates for the company? Then our free report on Kirloskar Pneumatic will help you uncover what's on the horizon.

Is There Enough Growth For Kirloskar Pneumatic?

Kirloskar Pneumatic's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The latest three year period has also seen an excellent 107% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 34% per year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% each year, which is noticeably less attractive.

With this information, we can see why Kirloskar Pneumatic is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Kirloskar Pneumatic's P/E?

The strong share price surge has got Kirloskar Pneumatic's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Kirloskar Pneumatic's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Kirloskar Pneumatic (1 is a bit concerning) you should be aware of.

Of course, you might also be able to find a better stock than Kirloskar Pneumatic. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com