Fintech Select Ltd. (CVE:FTEC) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 260% in the last year.
Following the firm bounce in price, Fintech Select may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 35.3x, since almost half of all companies in Canada have P/E ratios under 12x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, Fintech Select has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fintech Select will help you shine a light on its historical performance.
Is There Enough Growth For Fintech Select?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Fintech Select's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 388%. However, this wasn't enough as the latest three year period has seen a very unpleasant 87% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 11% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that Fintech Select's P/E sits above the majority of other companies. 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 Key Takeaway
Fintech Select's P/E is flying high just like its stock has during the last month. 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.
Our examination of Fintech Select revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.
Don't forget that there may be other risks. For instance, we've identified 7 warning signs for Fintech Select (2 are a bit concerning) you should be aware of.
Of course, you might also be able to find a better stock than Fintech Select. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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.
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