Stock Analysis

Karat Packaging Inc. (NASDAQ:KRT) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

NasdaqGS:KRT
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Despite an already strong run, Karat Packaging Inc. (NASDAQ:KRT) shares have been powering on, with a gain of 28% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Following the firm bounce in price, Karat Packaging's price-to-earnings (or "P/E") ratio of 22.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Karat Packaging as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Karat Packaging

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NasdaqGS:KRT Price Based on Past Earnings July 27th 2021
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Karat Packaging.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Karat Packaging's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 304%. Pleasingly, EPS has also lifted 259% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14% per annum, which is noticeably less attractive.

In light of this, it's understandable that Karat Packaging's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Karat Packaging's P/E

Karat Packaging's P/E is getting right up there since its shares have risen strongly. 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 Karat Packaging maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Karat Packaging is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

If these risks are making you reconsider your opinion on Karat Packaging, 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. 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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