When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 18x, you may consider Sapiens International Corporation N.V. (NASDAQ:SPNS) as a stock to avoid entirely with its 50.6x 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.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Sapiens International has been doing quite well of late. 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.
See our latest analysis for Sapiens International
Is There Enough Growth For Sapiens International?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Sapiens International’s to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 44%. Pleasingly, EPS has also lifted 793% 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 14% per annum as estimated by the four analysts watching the company. With the market predicted to deliver 13% growth each year, the company is positioned for a comparable earnings result.
With this information, we find it interesting that Sapiens International is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren’t willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Sapiens International’s P/E
It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Sapiens International’s analyst forecasts revealed that its market-matching earnings outlook isn’t impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren’t likely to support such positive sentiment for long. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.
It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 2 warning signs with Sapiens International, and understanding these should be part of your investment process.
If these risks are making you reconsider your opinion on Sapiens International, explore our interactive list of high quality stocks to get an idea of what else is out there.
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