Tera Software Limited's (NSE:TERASOFT) Stock Retreats 25% But Earnings Haven't Escaped The Attention Of Investors

Tera Software Limited (NSE:TERASOFT) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 197%.

In spite of the heavy fall in price, Tera Software's price-to-earnings (or "P/E") ratio of 28.9x might still make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 26x and even P/E's below 15x are quite common. 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.

With earnings growth that's exceedingly strong of late, Tera Software has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Tera Software

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Tera Software will help you shine a light on its historical performance.

How Is Tera Software's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Tera Software's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 58% gain to the company's bottom line. The latest three year period has also seen an excellent 3,226% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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

In light of this, it's understandable that Tera Software's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On Tera Software's P/E

Tera Software's P/E hasn't come down all the way after its stock plunged. 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 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.

You always need to take note of risks, for example - Tera Software has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.