When close to half the companies in India have price-to-earnings ratios (or “P/E’s”) below 14x, you may consider Persistent Systems Limited (NSE:PERSISTENT) as a stock to potentially avoid with its 21.7x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Persistent Systems has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.free report is a great place to start.
What Are Growth Metrics Telling Us About The High P/E?
The only time you’d be truly comfortable seeing a P/E as high as Persistent Systems’ is when the company’s growth is on track to outshine the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. EPS has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the analysts watching the company. With the market predicted to deliver 16% growth each year, the company is positioned for a weaker earnings result.
With this information, we find it concerning that Persistent Systems is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. 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.
What We Can Learn From Persistent Systems’ P/E?
Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Persistent Systems’ analyst forecasts revealed that its inferior earnings outlook isn’t impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren’t likely to support such positive sentiment for long. Unless these conditions improve markedly, it’s very challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we’ve spotted 3 warning signs for Persistent Systems you should be aware of.
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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