What Persistent Systems Limited's (NSE:PERSISTENT) 28% Share Price Gain Is Not Telling You

Persistent Systems Limited (NSE:PERSISTENT) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 95%.

Following the firm bounce in price, Persistent Systems may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 64.6x, since almost half of all companies in India have P/E ratios under 34x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Persistent Systems could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Persistent Systems

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Persistent Systems' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Pleasingly, EPS has also lifted 152% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 22% each year over the next three years. That's shaping up to be similar to the 22% per year growth forecast for the broader market.

In light of this, it's curious that Persistent Systems' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Persistent Systems' P/E

Persistent Systems' P/E is flying high just like its stock has during the last month. 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.

We've established that Persistent Systems currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Persistent Systems with six simple checks on some of these key factors.

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.

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