Nagarro SE (FRA:NA9) Stocks Shoot Up 31% But Its P/E Still Looks Reasonable

Nagarro SE (FRA:NA9) shareholders would be excited to see that the share price has had a great month, posting a 31% 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 26% over that time.

Following the firm bounce in price, given around half the companies in Germany have price-to-earnings ratios (or "P/E's") below 16x, you may consider Nagarro as a stock to potentially avoid with its 20.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Nagarro has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Nagarro

Keen to find out how analysts think Nagarro's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Nagarro's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Nagarro's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. This means it has also seen a slide in earnings over the longer-term as EPS is down 99% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 15% as estimated by the four analysts watching the company. With the market only predicted to deliver 9.6%, the company is positioned for a stronger earnings result.

With this information, we can see why Nagarro is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Nagarro's P/E?

Nagarro's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Nagarro you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.