InfoBeans Technologies Limited's (NSE:INFOBEAN) 29% Price Boost Is Out Of Tune With Earnings
InfoBeans Technologies Limited (NSE:INFOBEAN) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 84% in the last year.
After such a large jump in price, InfoBeans Technologies may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.8x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x 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 as high as it is.
With earnings growth that's exceedingly strong of late, InfoBeans Technologies has been doing very well. The P/E is probably high because investors think this strong 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 InfoBeans Technologies
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, InfoBeans Technologies would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 80%. As a result, it also grew EPS by 16% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it concerning that InfoBeans Technologies is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On InfoBeans Technologies' P/E
The large bounce in InfoBeans Technologies' shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of InfoBeans Technologies revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. 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.
You should always think about risks. Case in point, we've spotted 1 warning sign for InfoBeans Technologies you should be aware of.
If these risks are making you reconsider your opinion on InfoBeans Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.
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