Nexteq plc (LON:NXQ) Shares Fly 31% But Investors Aren't Buying For Growth

Nexteq plc (LON:NXQ) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 25% in the last twelve months.

Even after such a large jump in price, Nexteq's price-to-earnings (or "P/E") ratio of 7.9x might still make it look like a buy right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios above 15x and even P/E's above 28x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Nexteq certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Nexteq

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Is There Any Growth For Nexteq?

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

Retrospectively, the last year delivered an exceptional 158% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 339% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 27% as estimated by the dual analysts watching the company. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.

With this information, we are not surprised that Nexteq is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Nexteq's P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Nexteq maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising 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 Nexteq (1 is potentially serious!) that you need to be mindful of.

If you're unsure about the strength of Nexteq's 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.