Keyware Technologies NV's (EBR:KEYW) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 18.1x Keyware Technologies NV (EBR:KEYW) may be sending bearish signals at the moment, given that almost half of all companies in Belgium have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

We've discovered 1 warning sign about Keyware Technologies. View them for free.

Recent times have been quite advantageous for Keyware Technologies as its earnings have been rising very briskly. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Keyware Technologies

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 Keyware Technologies' earnings, revenue and cash flow.

Is There Enough Growth For Keyware Technologies?

The only time you'd be truly comfortable seeing a P/E as high as Keyware Technologies' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 263%. Pleasingly, EPS has also lifted 62% 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.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Keyware Technologies is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Keyware Technologies' P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Keyware Technologies revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. 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 take the next step, you should know about the 1 warning sign for Keyware Technologies that we have uncovered.

If you're unsure about the strength of Keyware Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.