Optex Systems Holdings, Inc's (NASDAQ:OPXS) Shares May Have Run Too Fast Too Soon

Optex Systems Holdings, Inc's (NASDAQ:OPXS) price-to-earnings (or "P/E") ratio of 22.4x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 14x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Optex Systems Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Optex Systems Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Optex Systems Holdings' earnings, revenue and cash flow.

Is There Enough Growth For Optex Systems Holdings?

Optex Systems Holdings' 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.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. Still, incredibly EPS has fallen 26% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 5.5% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Optex Systems Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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 Optex Systems Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Optex Systems Holdings 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 P/E ratio below 20x).

What are the risks and opportunities for Optex Systems Holdings?

NasdaqCM:OPXS

Optex Systems Holdings

Optex Systems Holdings, Inc. manufactures and sells optical sighting systems and assemblies primarily for the U.S.Show more

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Rewards

• Price-To-Earnings ratio (20x) is below the Aerospace & Defense industry average (24x)

• Earnings grew by 31.9% over the past year

Risks

• Does not have a meaningful market cap ($21M)

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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.