When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 21x, you may consider Mitek Systems, Inc. (NASDAQ:MITK) as a stock to avoid entirely with its 67.9x 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.
Recent times have been advantageous for Mitek Systems as its earnings have been rising faster 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.free report is a great place to start.
Is There Enough Growth For Mitek Systems?
The only time you'd be truly comfortable seeing a P/E as steep as Mitek Systems' is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 195% last year. Still, incredibly EPS has fallen 16% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 25% over the next year. That's shaping up to be materially higher than the 20% growth forecast for the broader market.
With this information, we can see why Mitek Systems is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
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.
As we suspected, our examination of Mitek Systems' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 4 warning signs for Mitek Systems that we have uncovered.
Of course, you might also be able to find a better stock than Mitek Systems. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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