Sonata Software Limited's (NSE:SONATSOFTW) 29% Jump Shows Its Popularity With Investors

Sonata Software Limited (NSE:SONATSOFTW) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 34x, you may consider Sonata Software as a stock to avoid entirely with its 58.2x P/E ratio. 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.

Sonata Software hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sonata Software

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sonata Software's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 26% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 44% per annum during the coming three years according to the six analysts following the company. With the market only predicted to deliver 22% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Sonata Software's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Sonata Software's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Sonata Software maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 4 warning signs for Sonata Software that you should be aware of.

Of course, you might also be able to find a better stock than Sonata Software. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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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