K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) Soars 25% But It's A Story Of Risk Vs Reward

K.C.P. Sugar and Industries Corporation Limited (NSE:KCPSUGIND) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 71%.

Although its price has surged higher, K.C.P. Sugar and Industries may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.6x, since almost half of all companies in India have P/E ratios greater than 35x and even P/E's higher than 65x 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.

As an illustration, earnings have deteriorated at K.C.P. Sugar and Industries over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for K.C.P. Sugar and Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on K.C.P. Sugar and Industries will help you shine a light on its historical performance.

How Is K.C.P. Sugar and Industries' Growth Trending?

K.C.P. Sugar and Industries' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 278% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that K.C.P. Sugar and Industries is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Shares in K.C.P. Sugar and Industries are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of K.C.P. Sugar and Industries revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for K.C.P. Sugar and Industries you should know about.

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.