Unpleasant Surprises Could Be In Store For OSI Systems, Inc.'s (NASDAQ:OSIS) Shares

OSI Systems, Inc.'s (NASDAQ:OSIS) price-to-earnings (or "P/E") ratio of 19.9x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

OSI Systems certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for OSI Systems

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, OSI Systems 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 51% last year. The latest three year period has also seen an excellent 114% overall rise in EPS, aided by its short-term performance. 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 5.8% during the coming year according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12%, which is noticeably more attractive.

In light of this, it's alarming that OSI Systems' 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On OSI Systems' P/E

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.

We've established that OSI Systems 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for OSI Systems you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, you might also be able to find a better stock than OSI Systems. 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com