There's Reason For Concern Over Kernex Microsystems (India) Limited's (NSE:KERNEX) Massive 44% Price Jump

Kernex Microsystems (India) Limited (NSE:KERNEX) shareholders have had their patience rewarded with a 44% share price jump in the last month. The last 30 days were the cherry on top of the stock's 337% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, Kernex Microsystems (India) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.6x, since almost half of all companies in India have P/E ratios under 21x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Kernex Microsystems (India)'s receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Kernex Microsystems (India)

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kernex Microsystems (India) will help you shine a light on its historical performance.

Is There Enough Growth For Kernex Microsystems (India)?

The only time you'd be truly comfortable seeing a P/E as steep as Kernex Microsystems (India)'s is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 27% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Kernex Microsystems (India) is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

The strong share price surge has got Kernex Microsystems (India)'s P/E rushing to great heights as well. 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 Kernex Microsystems (India) currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Kernex Microsystems (India), and understanding these should be part of your investment process.

If you're unsure about the strength of Kernex Microsystems (India)'s 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. 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.
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