Shareholders Should Be Pleased With Kotyark Industries Limited's (NSE:KOTYARK) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 31x, you may consider Kotyark Industries Limited (NSE:KOTYARK) as a stock to potentially avoid with its 41x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been quite advantageous for Kotyark Industries as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Kotyark Industries

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 603% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially lower than the company's recent medium-term annualised growth rates.

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

The Bottom Line On Kotyark Industries' P/E

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.

As we suspected, our examination of Kotyark Industries revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 5 warning signs for Kotyark Industries you should be aware of, and 3 of them are a bit unpleasant.

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.