Saksoft Limited's (NSE:SAKSOFT) Shares Climb 30% But Its Business Is Yet to Catch Up

Saksoft Limited (NSE:SAKSOFT) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 7.2% isn't as impressive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Saksoft's P/E ratio of 37.6x, since the median price-to-earnings (or "P/E") ratio in India is also close to 35x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen firmly for Saksoft recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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Does Growth Match The P/E?

In order to justify its P/E ratio, Saksoft would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 7.9%. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Saksoft's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Saksoft appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Saksoft currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Saksoft with six simple checks.

If these risks are making you reconsider your opinion on Saksoft, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.