When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider EPAM Systems, Inc. (NYSE:EPAM) as a stock to avoid entirely with its 35.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, EPAM Systems has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for EPAM Systems
How Is EPAM Systems' Growth Trending?
In order to justify its P/E ratio, EPAM Systems would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 15%. The latest three year period has also seen an excellent 44% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is not materially different.
With this information, we find it interesting that EPAM Systems is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Final Word
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that EPAM Systems currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for EPAM Systems with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than EPAM Systems. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.