Earnings Not Telling The Story For Calnex Solutions Plc (LON:CLX) After Shares Rise 32%

Despite an already strong run, Calnex Solutions Plc (LON:CLX) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 161% in the last year.

Following the firm bounce in price, Calnex Solutions' price-to-earnings (or "P/E") ratio of 36.1x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 21x and even P/E's below 11x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Calnex Solutions as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Calnex Solutions?

The only time you'd be truly comfortable seeing a P/E as steep as Calnex Solutions' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 4.7% over the next year. Meanwhile, the rest of the market is forecast to expand by 18%, which is noticeably more attractive.

In light of this, it's alarming that Calnex Solutions' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Calnex Solutions' P/E?

Shares in Calnex Solutions have built up some good momentum lately, which has really inflated its 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 Calnex Solutions currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Calnex Solutions has 1 warning sign we think you should be aware of.

If you're unsure about the strength of Calnex Solutions' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.

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