Investors Don't See Light At End Of Birlasoft Limited's (NSE:BSOFT) Tunnel And Push Stock Down 25%

To the annoyance of some shareholders, Birlasoft Limited (NSE:BSOFT) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 47% in that time.

Following the heavy fall in price, Birlasoft may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.3x, since almost half of all companies in India have P/E ratios greater than 26x and even P/E's higher than 49x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Birlasoft could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

Birlasoft's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 2.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 35% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 3.0% over the next year. That's shaping up to be materially lower than the 25% growth forecast for the broader market.

With this information, we can see why Birlasoft is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Birlasoft's P/E

Birlasoft's recently weak share price has pulled its P/E below most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Birlasoft's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Birlasoft that you need to take into consideration.

If these risks are making you reconsider your opinion on Birlasoft, 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.