Market Participants Recognise TXT e-solutions S.p.A.'s (BIT:TXT) Earnings Pushing Shares 25% Higher

TXT e-solutions S.p.A. (BIT:TXT) shares have continued their recent momentum with a 25% gain in the last month alone. The last month tops off a massive increase of 112% in the last year.

Following the firm bounce in price, TXT e-solutions' price-to-earnings (or "P/E") ratio of 25.3x might make it look like a strong sell right now compared to the market in Italy, where around half of the companies have P/E ratios below 14x and even P/E's below 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent earnings growth for TXT e-solutions has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for TXT e-solutions

Want the full picture on analyst estimates for the company? Then our free report on TXT e-solutions will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, TXT e-solutions would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.6% last year. Pleasingly, EPS has also lifted 231% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 24% per annum as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 14% per year growth forecast for the broader market.

With this information, we can see why TXT e-solutions is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From TXT e-solutions' P/E?

Shares in TXT e-solutions have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that TXT e-solutions 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. Unless these conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - TXT e-solutions has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.