VirTra, Inc.'s (NASDAQ:VTSI) 28% Price Boost Is Out Of Tune With Earnings

VirTra, Inc. (NASDAQ:VTSI) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The annual gain comes to 150% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that VirTra's price-to-earnings (or "P/E") ratio of 17.5x right now seems quite "middle-of-the-road" compared to the market in the United States, where the median P/E ratio is around 17x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

VirTra certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for VirTra

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

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

There's an inherent assumption that a company should be matching the market for P/E ratios like VirTra's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 326%. The strong recent performance means it was also able to grow EPS by 297% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 4.3% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12%, which is noticeably more attractive.

In light of this, it's curious that VirTra's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now VirTra's P/E is also back up to the market median. 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.

Our examination of VirTra's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for VirTra that you should be aware of.

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.

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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.