The Sage Group plc's (LON:SGE) Price Is Out Of Tune With Earnings

When close to half the companies in the United Kingdom have price-to-earnings ratios (or "P/E's") below 15x, you may consider The Sage Group plc (LON:SGE) as a stock to avoid entirely with its 38.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Sage Group. View them for free.

Sage Group certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Sage Group

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

How Is Sage Group's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 55% gain to the company's bottom line. The latest three year period has also seen a 27% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is not materially different.

In light of this, it's curious that Sage Group's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Sage Group's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Sage Group's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sage Group that you should be aware of.

Of course, you might also be able to find a better stock than Sage Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.