Givex Information Technology Group Limited (TSE:GIVX) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it’s now virtually flat for the year after the recent bounce.
Following the firm bounce in price, Givex Information Technology Group’s price-to-earnings (or “P/E”) ratio of 56.1x might make it look like a strong sell right now compared to the market in Canada, where around half of the companies have P/E ratios below 13x and even P/E’s below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.
Earnings have risen firmly for Givex Information Technology Group recently, which is pleasing to see. 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.
Although there are no analyst estimates available for Givex Information Technology Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Is There Enough Growth For Givex Information Technology Group?
The only time you’d be truly comfortable seeing a P/E as steep as Givex Information Technology Group’s is when the company’s growth is on track to outshine the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 20%. However, this wasn’t enough as the latest three year period has seen a very unpleasant 61% drop in EPS in aggregate. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 9.6% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that Givex Information Technology Group 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. There’s a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Bottom Line On Givex Information Technology Group’s P/E
Shares in Givex Information Technology Group have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that Givex Information Technology Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we’ve discovered 3 warning signs for Givex Information Technology Group that you should be aware of.
It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
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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.