Some Confidence Is Lacking In Kadant Inc.'s (NYSE:KAI) P/E

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Kadant Inc. (NYSE:KAI) as a stock to avoid entirely with its 35.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Kadant could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Kadant

Want the full picture on analyst estimates for the company? Then our free report on Kadant will help you uncover what's on the horizon.

Is There Enough Growth For Kadant?

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

Retrospectively, the last year delivered a frustrating 7.6% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 6.8% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 8.0% over the next year. That's shaping up to be materially lower than the 15% growth forecast for the broader market.

With this information, we find it concerning that Kadant is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 Kadant currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Kadant has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.