There's Reason For Concern Over Semler Scientific, Inc.'s (NASDAQ:SMLR) Massive 28% Price Jump

Semler Scientific, Inc. (NASDAQ:SMLR) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last month tops off a massive increase of 152% in the last year.

Following the firm bounce in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Semler Scientific as a stock to avoid entirely with its 42.3x P/E ratio. 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.

Semler Scientific certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Semler Scientific

Want the full picture on analyst estimates for the company? Then our free report on Semler Scientific will help you uncover what's on the horizon.

Does Growth Match The High P/E?

Semler Scientific'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.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 682% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 3.9% as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.

In light of this, it's alarming that Semler Scientific's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has got Semler Scientific's P/E rushing to great heights as well. 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 Semler Scientific'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Semler Scientific (of which 1 is a bit unpleasant!) you should know about.

You might be able to find a better investment than Semler Scientific. 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).

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.

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