Investors Appear Satisfied With Tera Software Limited's (NSE:TERASOFT) Prospects As Shares Rocket 27%

The Tera Software Limited (NSE:TERASOFT) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days were the cherry on top of the stock's 316% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, given around half the companies in India have price-to-earnings ratios (or "P/E's") below 24x, you may consider Tera Software as a stock to potentially avoid with its 34.5x 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 as high as it is.

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Recent times have been quite advantageous for Tera Software as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Tera 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 58% last year. The latest three year period has also seen an excellent 3,226% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 25% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's understandable that Tera Software's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The large bounce in Tera Software's shares has lifted the company's P/E to a fairly high level. 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 maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

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

If these risks are making you reconsider your opinion on Tera Software, 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.