Kamdhenu Limited (NSE:KAMDHENU) Might Not Be As Mispriced As It Looks After Plunging 25%

To the annoyance of some shareholders, Kamdhenu Limited (NSE:KAMDHENU) shares are down a considerable 25% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 53% share price decline.

Although its price has dipped substantially, Kamdhenu may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.1x, since almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 49x 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.

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Kamdhenu certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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 Low P/E?

In order to justify its P/E ratio, Kamdhenu would need to produce anemic growth that's substantially trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. The latest three year period has also seen an excellent 136% overall rise in EPS, aided by its short-term performance. 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.

In light of this, it's peculiar that Kamdhenu's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Kamdhenu's P/E looks about as weak as its stock price lately. 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.

We've established that Kamdhenu currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Kamdhenu (1 is potentially serious!) 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.