Fidel Softech Limited's (NSE:FIDEL) 42% Price Boost Is Out Of Tune With Earnings

Fidel Softech Limited (NSE:FIDEL) shares have had a really impressive month, gaining 42% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 50%.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 26x, you may consider Fidel Softech as a stock to potentially avoid with its 29x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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The earnings growth achieved at Fidel Softech over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Fidel Softech

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fidel Softech will help you shine a light on its historical performance.

How Is Fidel Softech's Growth Trending?

In order to justify its P/E ratio, Fidel Softech would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. The latest three year period has also seen a 25% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Fidel Softech's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

The Key Takeaway

Fidel Softech shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Fidel Softech 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. When we see weak earnings with slower than market growth, 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.

Before you settle on your opinion, we've discovered 2 warning signs for Fidel Softech that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.