4Sight Holdings Limited's (JSE:4SI) Shares Climb 39% But Its Business Is Yet to Catch Up

4Sight Holdings Limited (JSE:4SI) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 4.2% isn't as impressive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about 4Sight Holdings' P/E ratio of 10.3x, since the median price-to-earnings (or "P/E") ratio in South Africa is also close to 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

4Sight Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out the opportunities and risks within the ZA IT industry.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on 4Sight Holdings will help you shine a light on its historical performance.

Is There Some Growth For 4Sight Holdings?

In order to justify its P/E ratio, 4Sight Holdings would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 327% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 15% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that 4Sight Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From 4Sight Holdings' P/E?

Its shares have lifted substantially and now 4Sight Holdings' P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of 4Sight Holdings revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for 4Sight Holdings that you should be aware of.

Of course, you might also be able to find a better stock than 4Sight Holdings. 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.

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

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.