Is PSI Software AG’s (ETR:PSAN) Growth Strong Enough To Justify Its April Share Price?

Growth expectations for PSI Software AG (ETR:PSAN) are high, but many investors are starting to ask whether its last close at €17.7 can still be rationalized by the future potential. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

View our latest analysis for PSI Software

What are the future expectations?

PSI Software’s growth potential is very attractive. The consensus forecast from 6 analysts is extremely positive with earnings per share estimated to surge from current levels of €0.675 to €1.08 over the next three years. This results in an annual growth rate of 15%, on average, which indicates an exceedlingly positive future in the near term.

Is PSAN’s share price justified by its earnings growth?

PSAN is available at a PE (price-to-earnings) ratio of 26.2x today, which tells us the stock is undervalued based on its latest annual earnings update compared to the Software average of 35.8x , and overvalued compared to the DE market average ratio of 19.95x .

XTRA:PSAN Price Estimation Relative to Market, April 26th 2019
XTRA:PSAN Price Estimation Relative to Market, April 26th 2019

Given that PSAN’s price-to-earnings of 26.2x lies below the industry average, this already indicates that the company could be potentially undervalued. However, to properly examine the value of a high-growth stock such as PSI Software, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 26.2x and expected year-on-year earnings growth of 15% give PSI Software a higher PEG ratio of 1.74x. So, when we include the growth factor in our analysis, PSI Software appears a bit overvalued , based on its fundamentals.

What this means for you:

PSAN’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are PSAN’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has PSAN been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PSAN’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.