Kalyani Steels Limited (NSE:KSL) Held Back By Insufficient Growth Even After Shares Climb 26%

Kalyani Steels Limited (NSE:KSL) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The annual gain comes to 178% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Kalyani Steels may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.3x, since almost half of all companies in India have P/E ratios greater than 34x and even P/E's higher than 66x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Kalyani Steels 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.

View our latest analysis for Kalyani Steels

Although there are no analyst estimates available for Kalyani Steels, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 30% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

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

In light of this, it's understandable that Kalyani Steels' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Kalyani Steels' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Kalyani Steels maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Kalyani Steels (1 is a bit unpleasant) you should be aware of.

Of course, you might also be able to find a better stock than Kalyani Steels. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com