Investors Appear Satisfied With Scott Technology Limited's (NZSE:SCT) Prospects As Shares Rocket 25%

Scott Technology Limited (NZSE:SCT) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 31% in the last twelve months.

After such a large jump in price, Scott Technology's price-to-earnings (or "P/E") ratio of 24.3x might make it look like a sell right now compared to the market in New Zealand, where around half of the companies have P/E ratios below 20x and even P/E's below 12x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Scott Technology as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 12% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 31% each year as estimated by the sole analyst watching the company. That's shaping up to be materially higher than the 18% per year growth forecast for the broader market.

With this information, we can see why Scott Technology is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Scott Technology's P/E?

The large bounce in Scott Technology's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Scott Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Scott Technology is showing 3 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Scott Technology, 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.