Why Investors Shouldn't Be Surprised By Keynote Financial Services Limited's (NSE:KEYFINSERV) 26% Share Price Plunge

Keynote Financial Services Limited (NSE:KEYFINSERV) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 71%, which is great even in a bull market.

Since its price has dipped substantially, Keynote Financial Services may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.1x, since almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 50x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

We've discovered 3 warning signs about Keynote Financial Services. View them for free.

Keynote Financial Services certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Keynote Financial Services

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Keynote Financial Services' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Keynote Financial Services' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. Pleasingly, EPS has also lifted 55% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's understandable that Keynote Financial Services' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Having almost fallen off a cliff, Keynote Financial Services' share price has pulled its P/E way down as well. 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.

We've established that Keynote Financial Services maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Keynote Financial Services (1 doesn't sit too well with us!) that you need to be mindful of.

You might be able to find a better investment than Keynote Financial 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.