Stove Kraft Limited's (NSE:STOVEKRAFT) 34% Cheaper Price Remains In Tune With Earnings

The Stove Kraft Limited (NSE:STOVEKRAFT) share price has fared very poorly over the last month, falling by a substantial 34%. Still, a bad month hasn't completely ruined the past year with the stock gaining 30%, which is great even in a bull market.

Even after such a large drop in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 21x, you may still consider Stove Kraft as a stock to potentially avoid with its 30.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Stove Kraft hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Stove Kraft

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Stove Kraft.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Stove Kraft would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 6,023% 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 year should generate growth of 69% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 23%, which is noticeably less attractive.

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

The Bottom Line On Stove Kraft's P/E

There's still some solid strength behind Stove Kraft's P/E, if not its share price lately. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Stove Kraft maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Stove Kraft you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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.