Earnings Tell The Story For EPAM Systems, Inc. (NYSE:EPAM)

When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 19x, you may consider EPAM Systems, Inc. (NYSE:EPAM) as a stock to avoid entirely with its 58x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for EPAM Systems as its earnings have risen in spite of the market’s earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for EPAM Systems

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NYSE:EPAM Price Based on Past Earnings August 22nd 2020
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Is There Enough Growth For EPAM Systems?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The strong recent performance means it was also able to grow EPS by 143% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 20% each year over the next three years. 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 EPAM Systems’ P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On EPAM Systems’ P/E

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.

As we suspected, our examination of EPAM Systems’ analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. It’s hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for EPAM Systems that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.

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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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