Unfortunately for some shareholders, the Napco Security Technologies, Inc. (NASDAQ:NSSC) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 43% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Napco Security Technologies' price-to-earnings (or "P/E") ratio of 19.4x is worth a mention when the median P/E in the United States is similar at about 18x. 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.

Recent times have been advantageous for Napco Security Technologies as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 Napco Security Technologies

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

How Is Napco Security Technologies' Growth Trending?

Napco Security Technologies' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. The latest three year period has also seen an excellent 161% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 2.0% as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 15%.

With this information, we find it concerning that Napco Security Technologies is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

Following Napco Security Technologies' share price tumble, its P/E is now hanging on to the median market 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.

We've established that Napco Security Technologies currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Napco Security Technologies with six simple checks.

Of course, you might also be able to find a better stock than Napco Security Technologies. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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