K.P.R. Mill Limited's (NSE:KPRMILL) Subdued P/E Might Signal An Opportunity

It's not a stretch to say that K.P.R. Mill Limited's (NSE:KPRMILL) price-to-earnings (or "P/E") ratio of 33.2x 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.

K.P.R. Mill could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for K.P.R. Mill

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Does Growth Match The P/E?

In order to justify its P/E ratio, K.P.R. Mill would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 8.1%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 130% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we find it interesting that K.P.R. Mill is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that K.P.R. Mill currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - K.P.R. Mill has 1 warning sign we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.