Earnings Tell The Story For KPI Green Energy Limited (NSE:KPIGREEN) As Its Stock Soars 27%

KPI Green Energy Limited (NSE:KPIGREEN) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days were the cherry on top of the stock's 345% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, KPI Green Energy's price-to-earnings (or "P/E") ratio of 57.4x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 31x and even P/E's below 17x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, KPI Green Energy has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for KPI Green Energy

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

Is There Enough Growth For KPI Green Energy?

In order to justify its P/E ratio, KPI Green Energy would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 102%. The strong recent performance means it was also able to grow EPS by 1,053% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

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 understandable that KPI Green Energy's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From KPI Green Energy's P/E?

The strong share price surge has got KPI Green Energy's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of KPI Green Energy revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 4 warning signs for KPI Green Energy (1 is a bit unpleasant!) that we have uncovered.

If these risks are making you reconsider your opinion on KPI Green Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.