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With a price-to-earnings (or "P/E") ratio of 20.5x Nagarro SE (FRA:NA9) may be sending bearish signals at the moment, given that almost half of all companies in Germany have P/E ratios under 15x and even P/E's lower than 8x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings that are retreating more than the market's of late, Nagarro has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
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How Is Nagarro's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Nagarro's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 23%. As a result, earnings from three years ago have also fallen 99% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 15% over the next year. That's shaping up to be materially higher than the 9.5% growth forecast for the broader market.
With this information, we can see why Nagarro is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Nagarro's P/E
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.
We've established that Nagarro maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example - Nagarro has 2 warning signs we think you should be aware of.