Unpleasant Surprises Could Be In Store For Computershare Limited's (ASX:CPU) Shares

It's not a stretch to say that Computershare Limited's (ASX:CPU) price-to-earnings (or "P/E") ratio of 21.7x right now seems quite "middle-of-the-road" compared to the market in Australia, where the median P/E ratio is around 21x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Computershare certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Computershare

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

Is There Some Growth For Computershare?

The only time you'd be comfortable seeing a P/E like Computershare's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The latest three year period has also seen an excellent 177% 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 8.7% each year during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 17% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Computershare's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be 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 Computershare'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 Computershare's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Computershare that you need to take into consideration.

If these risks are making you reconsider your opinion on Computershare, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.