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WiseTech Global Limited's (ASX:WTC) Business Is Yet to Catch Up With Its Share Price

Simply Wall St
·3-min read

When close to half the companies in Australia have price-to-earnings ratios (or "P/E's") below 17x, you may consider WiseTech Global Limited (ASX:WTC) as a stock to avoid entirely with its 55.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for WiseTech Global as its earnings have risen in spite of the market's earnings going into reverse. 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.

See our latest analysis for WiseTech Global

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If you'd like to see what analysts are forecasting going forward, you should check out our free report on WiseTech Global.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like WiseTech Global's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 184%. The strong recent performance means it was also able to grow EPS by 362% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 0.1% each year over the next three years. That's shaping up to be materially lower than the 13% per year growth forecast for the broader market.

In light of this, it's alarming that WiseTech Global's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From WiseTech Global's 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.

Our examination of WiseTech Global's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

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).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.