Earnings Not Telling The Story For Tera Software Limited (NSE:TERASOFT) After Shares Rise 31%

Despite an already strong run, Tera Software Limited (NSE:TERASOFT) shares have been powering on, with a gain of 31% in the last thirty days. This latest share price bounce rounds out a remarkable 411% gain over the last twelve months.

Since its price has surged higher, given close to half the companies in India have price-to-earnings ratios (or "P/E's") below 30x, you may consider Tera Software as a stock to avoid entirely with its 46.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Tera Software as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Tera Software

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tera Software's earnings, revenue and cash flow.

How Is Tera Software's Growth Trending?

In order to justify its P/E ratio, Tera Software would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 173% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 24% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Tera Software is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Tera Software's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Tera Software currently trades on a much 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 high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Tera Software that we have uncovered.

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.