Some Newgen Software Technologies Limited (NSE:NEWGEN) Shareholders Look For Exit As Shares Take 39% Pounding

Newgen Software Technologies Limited (NSE:NEWGEN) shareholders won't be pleased to see that the share price has had a very rough month, dropping 39% and undoing the prior period's positive performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 24%.

Even after such a large drop in price, Newgen Software Technologies may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.4x, since almost half of all companies in India have P/E ratios under 29x and even P/E's lower than 17x 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.

Recent times have been advantageous for Newgen Software Technologies as its earnings have been rising faster than most other companies. 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.

View our latest analysis for Newgen Software Technologies

Keen to find out how analysts think Newgen Software Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Newgen Software Technologies?

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. The strong recent performance means it was also able to grow EPS by 92% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to expand by 26%, which is noticeably more attractive.

In light of this, it's alarming that Newgen Software Technologies' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future 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?

Even after such a strong price drop, Newgen Software Technologies' P/E still exceeds the rest of the market significantly. 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.

We've established that Newgen Software Technologies currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Newgen Software Technologies (at least 1 which is potentially serious), and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.