More Unpleasant Surprises Could Be In Store For Spacenet Enterprises India Limited's (NSE:SPCENET) Shares After Tumbling 33%

The Spacenet Enterprises India Limited (NSE:SPCENET) share price has fared very poorly over the last month, falling by a substantial 33%. For any long-term shareholders, the last month ends a year to forget by locking in a 53% share price decline.

Even after such a large drop in price, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 32x, you may still consider Spacenet Enterprises India as a stock to avoid entirely with its 79.4x 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.

Spacenet Enterprises India certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Spacenet Enterprises India

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 Spacenet Enterprises India's earnings, revenue and cash flow.

Is There Enough Growth For Spacenet Enterprises India?

Spacenet Enterprises India's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Spacenet Enterprises India's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Spacenet Enterprises India's P/E?

A significant share price dive has done very little to deflate Spacenet Enterprises India's very lofty 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 Spacenet Enterprises India revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Spacenet Enterprises India (2 are a bit concerning!) that you need to be mindful of.

You might be able to find a better investment than Spacenet Enterprises India. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.