VirTra, Inc. (NASDAQ:VTSI) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.
Following the firm bounce in price, VirTra may be sending very bearish signals at the moment with a price-to-earnings (or “P/E”) ratio of 30.5x, since almost half of all companies in the United States have P/E ratios under 17x and even P/E’s lower than 10x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
While the market has experienced earnings growth lately, VirTra’s earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
View our latest analysis for VirTra
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How Is VirTra’s Growth Trending?
The only time you’d be truly comfortable seeing a P/E as steep as VirTra’s is when the company’s growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 68%. The last three years don’t look nice either as the company has shrunk EPS by 16% in aggregate. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 32% over the next year. That’s shaping up to be materially higher than the 13% growth forecast for the broader market.
With this information, we can see why VirTra is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
VirTra’s P/E is flying high just like its stock has during the last month. It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that VirTra maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware VirTra is showing 4 warning signs in our investment analysis, and 1 of those shouldn’t be ignored.
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 low P/E).
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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.
