Improved Earnings Required Before Kamat Hotels (India) Limited (NSE:KAMATHOTEL) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 3x Kamat Hotels (India) Limited (NSE:KAMATHOTEL) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 14x and even P/E's higher than 32x are not unusual. 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 exceedingly strong of late, Kamat Hotels (India) has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform 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 out of favour.

View our latest analysis for Kamat Hotels (India)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kamat Hotels (India) will help you shine a light on its historical performance.

How Is Kamat Hotels (India)'s Growth Trending?

In order to justify its P/E ratio, Kamat Hotels (India) would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. Still, incredibly EPS has fallen 40% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 0.7% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Kamat Hotels (India)'s P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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 Kamat Hotels (India) maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 4 warning signs for Kamat Hotels (India) (2 shouldn't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Kamat Hotels (India)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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