Investors Appear Satisfied With Keywords Studios plc's (LON:KWS) Prospects

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider Keywords Studios plc (LON:KWS) as a stock to avoid entirely with its 53.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, Keywords Studios has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Keywords Studios

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Keywords Studios.

Is There Enough Growth For Keywords Studios?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%. This means it has also seen a slide in earnings over the longer-term as EPS is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 45% per year as estimated by the eleven analysts watching the company. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

In light of this, it's understandable that Keywords Studios' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Keywords Studios' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Keywords Studios 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Keywords Studios, and understanding them should be part of your investment process.

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 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.