Oracle Financial Services Software Limited's (NSE:OFSS) 26% Price Boost Is Out Of Tune With Earnings

Oracle Financial Services Software Limited (NSE:OFSS) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The annual gain comes to 152% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Oracle Financial Services Software's price-to-earnings (or "P/E") ratio of 38.5x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 32x and even P/E's below 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

There hasn't been much to differentiate Oracle Financial Services Software's and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Oracle Financial Services Software 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 23% last year. EPS has also lifted 25% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 10% as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

In light of this, it's alarming that Oracle Financial Services Software's 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Oracle Financial Services Software's P/E?

The large bounce in Oracle Financial Services Software's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Oracle Financial Services Software's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Oracle Financial Services Software 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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