KNR Constructions Limited's (NSE:KNRCON) Share Price Is Matching Sentiment Around Its Earnings

KNR Constructions Limited's (NSE:KNRCON) price-to-earnings (or "P/E") ratio of 7.4x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 31x and even P/E's above 58x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, KNR Constructions has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for KNR Constructions

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like KNR Constructions' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 180% 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 slump, contracting by 22% per annum during the coming three years according to the analysts following the company. That's not great when the rest of the market is expected to grow by 19% per annum.

In light of this, it's understandable that KNR Constructions' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

As we suspected, our examination of KNR Constructions' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for KNR Constructions that you need to be mindful of.

If these risks are making you reconsider your opinion on KNR Constructions, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.