CSP Inc.'s (NASDAQ:CSPI) 29% Cheaper Price Remains In Tune With Earnings

The CSP Inc. (NASDAQ:CSPI) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 105% in the last twelve months.

Although its price has dipped substantially, CSP may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.8x, since almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

CSP has been doing a good job lately as it's been growing earnings at a solid pace. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for CSP

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

How Is CSP's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 24%. Pleasingly, EPS has also lifted 1,607% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why CSP is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On CSP's P/E

A significant share price dive has done very little to deflate CSP's very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of CSP revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for CSP (1 is a bit concerning!) that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.