There are reasons to be concerned about Kernex Microsystems (India) Limited’s massive 44% price hike (NSE: KERNEX)
Kernex Microsystems (India) Limited (NSE: KERNEX) Shareholders saw their patience rewarded with a 44% jump in the share price last month. The past 30 days have been the icing on the cake of the 337% share gain over the past year, which is nothing short of spectacular.
Since its price has increased, Kernex Microsystems (India) could be sending very bearish signals right now with a price-to-earnings (or “P / E”) ratio of 47.6x, as nearly half of all companies in India have P / E ratios below 21x and even P / E below 11x are not unusual. Nonetheless, we’ll need to dig a little deeper to determine if there is a rational basis for the very high P / E.
For example, the declining profits of Kernex Microsystems (India) lately should give food for thought. Many may expect the company to continue to outperform most other companies over the coming period which has kept the P / E from collapsing. If not, existing shareholders may be quite worried about the viability of the share price.
See our latest review for Kernex Microsystems (India)
Want a complete picture of the company’s profits, revenues and cash flow? Then our free Kernex Microsystems (India) report will help you shed light on its historical performance.
Is there enough growth for Kernex Microsystems (India)?
The only time you’d be really comfortable seeing a P / E as high as that of Kernex Microsystems (India) is when the growth of the company is set to definitely outperform the market.
Looking back first, the growth in earnings per share of the company last year was not thrilled as it posted a disappointing 41% decline. This hasn’t erased any of his gains over the past three years, with virtually no change in EPS overall. So it seems to us that the company has had a mixed result in terms of earnings growth during this period.
The weighting of this recent medium-term earnings trajectory against the forecast of a 27% expansion of the broad market shows that it is significantly less attractive on an annualized basis.
With this information, we are concerned that Kernex Microsystems (India) is trading at a higher P / E than the market. It appears that most investors are ignoring the recent fairly limited growth rates and are hoping for a turnaround in the company’s business outlook. There is a good chance that existing shareholders are bracing for future disappointment if the P / E falls to levels more in line with recent growth rates.
The last word
The sharp rise in stock prices also pushed the P / E of Kernex Microsystems (India) to new heights. Generally, we prefer to limit the use of the price / earnings ratio to establishing what the market thinks about the overall health of a business.
We have established that Kernex Microsystems (India) is currently trading at a much higher P / E than expected as its recent three-year growth is lower than the broader market forecast. Right now we are increasingly uncomfortable with the high P / E as this earnings performance is unlikely to support such positive sentiment for long. Unless recent medium-term conditions improve significantly, it is very difficult to accept these prices as reasonable.
It is always necessary to consider the ever-present specter of investment risk. We have identified 4 warning signs with Kernex Microsystems (India), and understanding them should be part of your investment process.
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