Kaveri Seed Company Limited (NSE:KSCL) Stock Catapults 33% Though Its Price And Business Still Lag The Market

Kaveri Seed Company Limited (NSE:KSCL) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

Even after such a large jump in price, Kaveri Seed may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.3x, since almost half of all companies in India have P/E ratios greater than 32x and even P/E's higher than 60x 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.

Recent times haven't been advantageous for Kaveri Seed as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

Check out our latest analysis for Kaveri Seed

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kaveri Seed.

Does Growth Match The Low P/E?

Kaveri Seed's 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.

Retrospectively, the last year delivered a decent 7.5% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 2.8% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 13% over the next year. With the market predicted to deliver 24% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Kaveri Seed's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Kaveri Seed's P/E?

Kaveri Seed's recent share price jump still sees its P/E sitting firmly flat on the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Kaveri Seed's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Kaveri Seed, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Kaveri Seed, 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.