When nearly half of businesses in the United States have price-to-earnings (or “P / E”) ratios below 17x, you might consider Magic Software Enterprises Ltd. (NASDAQ: MGIC) as a stock to be avoided entirely with its P / E ratio of 36.6x. Although it is not wise to just take the P / E at face value as there may be an explanation why it is so high.
The last few days have been good for Magic Software Enterprises as its profits have grown faster than most other companies. It looks like many are expecting the strong earnings performance to persist, which pushed up the P / E. You really hope so, otherwise you are paying a pretty high price for no particular reason.
NasdaqGS: MGIC price based on past revenue on December 25, 2021
free Magic Software Enterprises report
What do the growth indicators tell us about the high P / E?
There is an inherent assumption that a company would have to far outperform the market for P / E ratios like Magic Software Enterprises to be considered reasonable.
In retrospect, last year generated an exceptional 71% gain in the company’s bottom line. Fortunately, BPA is also up 36% overall from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job increasing its profits during this period.
Looking ahead, EPS is expected to increase 48% over the coming year according to the two analysts who follow the company. This promises to be significantly higher than the growth forecast of 11% for the market as a whole.
In light of this, it’s understandable that the P / E of Magic Software Enterprises is above the majority of other companies. Apparently, shareholders are unwilling to get rid of something that potentially contemplates a more prosperous future.
The last word
It is argued that the price / earnings ratio is a lower measure of value in some industries, but it can be a powerful indicator of corporate sentiment.
As we suspected, our review of Magic Software Enterprises’ analyst forecast revealed that its superior earnings outlook is contributing to its high P / E. Right now, shareholders are comfortable with the P / E because they are quite confident that future earnings are not threatened. It is difficult to see the share price drop sharply in the near future under these circumstances.
You should always take note of the risks, for example – Magic Software Enterprises has 1 warning sign we think you should be aware.
If these risks make you reconsider your opinion of Magic Software Enterprises, to explore our interactive list of high quality actions to get an idea of what else is there.
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