Optimistic Investors Push Faze Three Limited (NSE:FAZE3Q) Shares Up 30% But Growth Is Lacking

Faze Three Limited (NSE:FAZE3Q) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

Following the firm bounce in price, Faze Three's price-to-earnings (or "P/E") ratio of 47.2x might make it look like a strong sell right now compared to the market in India, where around half of the companies have P/E ratios below 27x and even P/E's below 15x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 2 warning signs about Faze Three. View them for free.

For instance, Faze Three's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Faze Three

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Faze Three's earnings, revenue and cash flow.

Is There Enough Growth For Faze Three?

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

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.

In light of this, it's alarming that Faze Three's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Faze Three's P/E

Shares in Faze Three have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Faze Three currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Faze Three that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.