Even With A 35% Surge, Cautious Investors Are Not Rewarding Kothari Petrochemicals Limited's (NSE:KOTHARIPET) Performance Completely

Kothari Petrochemicals Limited (NSE:KOTHARIPET) shares have continued their recent momentum with a 35% gain in the last month alone. The annual gain comes to 117% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may still consider Kothari Petrochemicals as an attractive investment with its 21.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Kothari Petrochemicals as its earnings have been rising very briskly. 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.

View our latest analysis for Kothari Petrochemicals

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 Kothari Petrochemicals' earnings, revenue and cash flow.

Is There Any Growth For Kothari Petrochemicals?

In order to justify its P/E ratio, Kothari Petrochemicals would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. The latest three year period has also seen an excellent 135% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb 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 Kothari Petrochemicals 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.

What We Can Learn From Kothari Petrochemicals' P/E?

The latest share price surge wasn't enough to lift Kothari Petrochemicals' P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kothari Petrochemicals currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Kothari Petrochemicals that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.