Synectics plc (LON:SNX) Soars 27% But It's A Story Of Risk Vs Reward

Synectics plc (LON:SNX) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 87%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Synectics' P/E ratio of 17.4x, since the median price-to-earnings (or "P/E") ratio in the United Kingdom is also close to 16x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Synectics certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Synectics

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Does Growth Match The P/E?

In order to justify its P/E ratio, Synectics would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 47% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 15% each year growth forecast for the broader market.

In light of this, it's curious that Synectics' P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Synectics' P/E

Synectics' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Synectics currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

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

If you're unsure about the strength of Synectics' 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.