Napatech A/S' (OB:NAPA) Popularity With Investors Under Threat As Stock Sinks 28%

Napatech A/S (OB:NAPA) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Indeed, the recent drop has reduced its annual gain to a relatively sedate 3.4% over the last twelve months.

Although its price has dipped substantially, Napatech's price-to-earnings (or "P/E") ratio of 31x might still make it look like a strong sell right now compared to the market in Norway, where around half of the companies have P/E ratios below 14x and even P/E's below 7x 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 so lofty.

With earnings growth that's superior to most other companies of late, Napatech has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Napatech

Keen to find out how analysts think Napatech's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Napatech's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 424% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 13% as estimated by the only analyst watching the company. That's not great when the rest of the market is expected to grow by 37%.

With this information, we find it concerning that Napatech is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

Even after such a strong price drop, Napatech's P/E still exceeds the rest of the market significantly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Napatech currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Napatech is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

You might be able to find a better investment than Napatech. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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.