Subdued Growth No Barrier To Harris Technology Group Limited (ASX:HT8) With Shares Advancing 30%

Harris Technology Group Limited (ASX:HT8) shareholders have had their patience rewarded with a 30% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Following the firm bounce in price, Harris Technology Group's price-to-earnings (or "P/E") ratio of 25.5x might make it look like a strong sell right now compared to the market in Australia, where around half of the companies have P/E ratios below 16x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Harris Technology Group has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Harris Technology Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Harris Technology Group's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Harris Technology Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Harris Technology Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Harris Technology Group's P/E is flying high just like its stock has during the last month. 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.

We've established that Harris Technology Group currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 5 warning signs for Harris Technology Group (1 is a bit unpleasant!) that you should be aware of.

You might be able to find a better investment than Harris Technology Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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.

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