Earnings Not Telling The Story For Computer Engineering & Consulting Ltd. (TSE:9692) After Shares Rise 27%

Despite an already strong run, Computer Engineering & Consulting Ltd. (TSE:9692) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Computer Engineering & Consulting's P/E ratio of 16x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

While the market has experienced earnings growth lately, Computer Engineering & Consulting's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Computer Engineering & Consulting

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Computer Engineering & Consulting.

How Is Computer Engineering & Consulting's Growth Trending?

In order to justify its P/E ratio, Computer Engineering & Consulting would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. 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 21% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 6.2% each year over the next three years. That's shaping up to be materially lower than the 9.6% per year growth forecast for the broader market.

In light of this, it's curious that Computer Engineering & Consulting's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Computer Engineering & Consulting's P/E?

Computer Engineering & Consulting's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Computer Engineering & Consulting currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Computer Engineering & Consulting with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.

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