When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 26x, you may consider Computer Age Management Services Limited (NSE:CAMS) as a stock to avoid entirely with its 42x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Recent times have been advantageous for Computer Age Management Services as its earnings have been rising faster 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 Computer Age Management Services
Is There Enough Growth For Computer Age Management Services?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Computer Age Management Services' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 42%. Pleasingly, EPS has also lifted 66% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.2% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.
With this information, we find it concerning that Computer Age Management Services is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Computer Age Management Services' 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.
We've established that Computer Age Management Services 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Computer Age Management Services you should know about.
If these risks are making you reconsider your opinion on Computer Age Management Services, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.