Earnings Tell The Story For Water Intelligence plc (LON:WATR)

Water Intelligence plc's (LON:WATR) price-to-earnings (or "P/E") ratio of 43.7x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 17x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Water Intelligence has been doing a good job lately as it's been growing earnings at a solid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Water Intelligence

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Water Intelligence's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Water Intelligence would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. The strong recent performance means it was also able to grow EPS by 159% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.6% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Water Intelligence's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Water Intelligence revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Water Intelligence.

You might be able to find a better investment than Water Intelligence. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

This article by Simply Wall St is general in nature. 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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