Krsnaa Diagnostics Limited (NSE:KRSNAA) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Krsnaa Diagnostics Limited (NSE:KRSNAA) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 29%.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Krsnaa Diagnostics as a stock to potentially avoid with its 35.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Krsnaa Diagnostics as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Krsnaa Diagnostics

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

What Are Growth Metrics Telling Us About The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 31% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 22% per annum growth forecast for the broader market.

With this information, we can see why Krsnaa Diagnostics is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Krsnaa Diagnostics' P/E is getting right up there since its shares have risen strongly. 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.

We've established that Krsnaa Diagnostics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Krsnaa Diagnostics, and understanding should be part of your investment process.

If you're unsure about the strength of Krsnaa Diagnostics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.