Earnings Not Telling The Story For PSG Konsult Limited (JSE:KST) After Shares Rise 29%

Despite an already strong run, PSG Konsult Limited (JSE:KST) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 81%.

Since its price has surged higher, given close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") below 13x, you may consider PSG Konsult as a stock to avoid entirely with its 24.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at PSG Konsult over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for PSG Konsult

Although there are no analyst estimates available for PSG Konsult, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is PSG Konsult's Growth Trending?

PSG Konsult'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 a decent 8.4% gain to the company's bottom line. The latest three year period has also seen a 22% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 61% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that PSG Konsult is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On PSG Konsult's P/E

PSG Konsult's P/E is flying high just like its stock has during the last month. 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.

We've established that PSG Konsult currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for PSG Konsult you should know about.

Of course, you might also be able to find a better stock than PSG Konsult. 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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This article by Simply Wall St is general in nature. 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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