Market Participants Recognise Newgen Software Technologies Limited's (NSE:NEWGEN) Earnings Pushing Shares 29% Higher

Newgen Software Technologies Limited (NSE:NEWGEN) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The annual gain comes to 267% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Newgen Software Technologies may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 56.8x, since almost half of all companies in India have P/E ratios under 31x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Newgen Software Technologies 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.

View our latest analysis for Newgen Software Technologies

Want the full picture on analyst estimates for the company? Then our free report on Newgen Software Technologies will help you uncover what's on the horizon.

How Is Newgen Software Technologies' Growth Trending?

Newgen Software Technologies' 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.

If we review the last year of earnings growth, the company posted a terrific increase of 42%. Pleasingly, EPS has also lifted 97% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 27% per year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 20% per annum, which is noticeably less attractive.

With this information, we can see why Newgen Software Technologies is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in Newgen Software Technologies have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Newgen Software Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Newgen Software Technologies that we have uncovered.

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.