Kapston Services Limited's (NSE:KAPSTON) 26% Price Boost Is Out Of Tune With Earnings

Kapston Services Limited (NSE:KAPSTON) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 98%.

Although its price has surged higher, it's still not a stretch to say that Kapston Services' price-to-earnings (or "P/E") ratio of 30.6x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 31x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Kapston Services certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

Check out our latest analysis for Kapston Services

Although there are no analyst estimates available for Kapston Services, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kapston Services' Growth Trending?

The only time you'd be comfortable seeing a P/E like Kapston Services' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 98% last year. As a result, it also grew EPS by 12% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it interesting that Kapston Services is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Kapston Services' P/E?

Kapston Services' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Kapston Services revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Kapston Services (2 are significant) you should be aware of.

You might be able to find a better investment than Kapston Services. 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.