Innodata Inc.'s (NASDAQ:INOD) Popularity With Investors Under Threat As Stock Sinks 26%

Innodata Inc. (NASDAQ:INOD) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 36%, which is great even in a bull market.

Although its price has dipped substantially, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may still consider Innodata as a stock to avoid entirely with its 52.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Innodata certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Innodata

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

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 55%. 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.

Looking ahead now, EPS is anticipated to slump, contracting by 1.7% during the coming year according to the four analysts following the company. With the market predicted to deliver 16% growth , that's a disappointing outcome.

In light of this, it's alarming that Innodata's P/E sits above the majority of other companies. 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 Bottom Line On Innodata's P/E

Innodata's shares may have retreated, but its P/E is still flying high. 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.

Our examination of Innodata's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Innodata that you need to be mindful of.

Of course, you might also be able to find a better stock than Innodata. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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