Newgen Software Technologies Limited's (NSE:NEWGEN) 43% Price Boost Is Out Of Tune With Earnings

Newgen Software Technologies Limited (NSE:NEWGEN) shares have had a really impressive month, gaining 43% after a shaky period beforehand. The annual gain comes to 113% 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 71.9x, since almost half of all companies in India have P/E ratios under 33x and even P/E's lower than 19x are not unusual. 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.

With earnings growth that's superior to most other companies of late, Newgen Software Technologies has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Newgen Software Technologies

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Newgen Software Technologies.

Is There Enough Growth For Newgen Software Technologies?

In order to justify its P/E ratio, Newgen Software Technologies would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. The latest three year period has also seen an excellent 96% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the five analysts watching the company. That's shaping up to be similar to the 19% per annum growth forecast for the broader market.

With this information, we find it interesting that Newgen Software Technologies is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Newgen Software Technologies' P/E?

Shares in Newgen Software Technologies have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Newgen Software Technologies' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Newgen Software Technologies (1 is a bit concerning) you should be aware of.

You might be able to find a better investment than Newgen Software Technologies. 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.