Investors Appear Satisfied With Magic Software Enterprises Ltd.'s (NASDAQ:MGIC) Prospects

Magic Software Enterprises Ltd.'s (NASDAQ:MGIC) price-to-earnings (or "P/E") ratio of 50.6x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 19x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Magic Software Enterprises as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Magic Software Enterprises

Keen to find out how analysts think Magic Software Enterprises' future stacks up against the industry? In that case, our free report is a great place to start.

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 Magic Software Enterprises' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.5% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 93% as estimated by the twin analysts watching the company. With the market only predicted to deliver 4.2%, the company is positioned for a stronger earnings result.

With this information, we can see why Magic Software Enterprises is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Magic Software Enterprises' P/E?

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 Magic Software Enterprises maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Magic Software Enterprises is showing 3 warning signs in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E 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.

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