K&O Energy Group Inc. (TSE:1663) May Have Run Too Fast Too Soon With Recent 26% Price Plummet

To the annoyance of some shareholders, K&O Energy Group Inc. (TSE:1663) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about K&O Energy Group's P/E ratio of 10.4x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 12x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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K&O Energy Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for K&O Energy Group

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Does Growth Match The P/E?

In order to justify its P/E ratio, K&O Energy Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's bottom line. Even so, admirably EPS has lifted 116% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the one analyst covering the company suggest earnings growth is heading into negative territory, declining 35% over the next year. Meanwhile, the broader market is forecast to expand by 10%, which paints a poor picture.

In light of this, it's somewhat alarming that K&O Energy Group's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

What We Can Learn From K&O Energy Group's P/E?

With its share price falling into a hole, the P/E for K&O Energy Group looks quite average now. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that K&O Energy Group currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for K&O Energy Group that you should be aware of.

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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.