Further Upside For Kamdhenu Limited (NSE:KAMDHENU) Shares Could Introduce Price Risks After 25% Bounce

Kamdhenu Limited (NSE:KAMDHENU) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last month tops off a massive increase of 102% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Kamdhenu's price-to-earnings (or "P/E") ratio of 32.1x is worth a mention when the median P/E in India is similar at about 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

The earnings growth achieved at Kamdhenu over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform 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 not quite in favour.

Check out our latest analysis for Kamdhenu

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Kamdhenu's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Kamdhenu's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. Pleasingly, EPS has also lifted 170% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Kamdhenu is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

Its shares have lifted substantially and now Kamdhenu's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Kamdhenu revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Kamdhenu that you need to be mindful of.

Of course, you might also be able to find a better stock than Kamdhenu. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.