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華爾街日報Tata Consultancy Services Limited's (NSE:TCS) Share Price Could Signal Some Risk
There wouldn't be many who think Tata Consultancy Services Limited's (NSE:TCS) price-to-earnings (or "P/E") ratio of 23.8x is worth a mention when the median P/E in India is similar at about 25x. 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 haven't been advantageous for Tata Consultancy Services as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Tata Consultancy Services
Is There Some Growth For Tata Consultancy Services?
In order to justify its P/E ratio, Tata Consultancy Services would need to produce growth that's similar to the market.
If we review the last year of earnings growth, the company posted a worthy increase of 4.5%. The latest three year period has also seen a 27% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 7.4% each year over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.
In light of this, it's curious that Tata Consultancy Services' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Tata Consultancy Services currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Tata Consultancy Services has 1 warning sign we think you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.