The Price Is Right For Nagarro SE (ETR:NA9)

When close to half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider Nagarro SE (ETR:NA9) as a stock to potentially avoid with its 21.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Nagarro has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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How Is Nagarro's Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 86% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 20% per annum over the next three years. That's shaping up to be materially higher than the 16% each year growth forecast for the broader market.

With this information, we can see why Nagarro is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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 Nagarro maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Nagarro has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Nagarro, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.