After Leaping 27% Kandarp Digi Smart BPO Limited (NSE:KANDARP) Shares Are Not Flying Under The Radar

Kandarp Digi Smart BPO Limited (NSE:KANDARP) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 179% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Kandarp Digi Smart BPO's price-to-earnings (or "P/E") ratio of 49.4x 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 34x and even P/E's below 19x 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.

As an illustration, earnings have deteriorated at Kandarp Digi Smart BPO over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Kandarp Digi Smart BPO

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kandarp Digi Smart BPO will help you shine a light on its historical performance.

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

In order to justify its P/E ratio, Kandarp Digi Smart BPO would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 570% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Kandarp Digi Smart BPO's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Kandarp Digi Smart BPO's P/E

The large bounce in Kandarp Digi Smart BPO's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Kandarp Digi Smart BPO revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Kandarp Digi Smart BPO (3 are potentially serious!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.