Converge Technology Solutions Corp.'s (TSE:CTS) 32% Jump Shows Its Popularity With Investors

Converge Technology Solutions Corp. (TSE:CTS) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Since its price has surged higher, given close to half the companies in Canada have price-to-earnings ratios (or "P/E's") below 10x, you may consider Converge Technology Solutions as a stock to avoid entirely with its 71x P/E ratio. 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 superior to most other companies of late, Converge Technology Solutions has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Converge Technology Solutions

Want the full picture on analyst estimates for the company? Then our free report on Converge Technology Solutions will help you uncover what's on the horizon.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 127% 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.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 107% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 8.1% each year, which is noticeably less attractive.

In light of this, it's understandable that Converge Technology Solutions' 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 Converge Technology Solutions' P/E

Shares in Converge Technology Solutions have built up some good momentum lately, which has really inflated its 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.

We've established that Converge Technology Solutions maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Converge Technology Solutions that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.