Why Investors Shouldn't Be Surprised By Kotyark Industries Limited's (NSE:KOTYARK) 28% Share Price Plunge

Unfortunately for some shareholders, the Kotyark Industries Limited (NSE:KOTYARK) share price has dived 28% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 75% share price decline.

After such a large drop in price, Kotyark Industries' price-to-earnings (or "P/E") ratio of 16.1x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 30x and even P/E's above 58x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Kotyark Industries over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming 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.

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.

How Is Kotyark Industries' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Kotyark Industries' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 2.1% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 23% 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 Kotyark Industries' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Kotyark Industries' P/E

Kotyark Industries' P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kotyark Industries 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. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You always need to take note of risks, for example - Kotyark Industries has 4 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Kotyark Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.