Earnings Not Telling The Story For Napco Security Technologies, Inc. (NASDAQ:NSSC)

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider Napco Security Technologies, Inc. (NASDAQ:NSSC) as a stock to potentially avoid with its 26.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Napco Security Technologies 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Napco Security Technologies

Keen to find out how analysts think Napco Security Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Napco Security Technologies?

In order to justify its P/E ratio, Napco Security Technologies would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 46% last year. The strong recent performance means it was also able to grow EPS by 142% 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.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 15% growth forecast for the broader market.

With this information, we find it concerning that Napco Security Technologies is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Napco Security Technologies 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Napco Security Technologies with six simple checks on some of these key factors.

If you're unsure about the strength of Napco Security Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.