Some Sapiens International Corporation N.V. (NASDAQ:SPNS) Shareholders Look For Exit As Shares Take 25% Pounding

Sapiens International Corporation N.V. (NASDAQ:SPNS) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The last month has meant the stock is now only up 7.3% during the last year.

In spite of the heavy fall in price, Sapiens International may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.3x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's superior to most other companies of late, Sapiens International has been doing relatively well. 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.

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Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. Pleasingly, EPS has also lifted 66% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 5.7% per year as estimated by the four analysts watching the company. With the market predicted to deliver 11% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Sapiens International is trading at a P/E higher than the market. 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 this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Sapiens International's P/E

Despite the recent share price weakness, Sapiens International's P/E remains higher than most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sapiens International currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Sapiens International with six simple checks.

If these risks are making you reconsider your opinion on Sapiens International, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.