Cyient Limited's (NSE:CYIENT) Shares May Have Run Too Fast Too Soon

With a median price-to-earnings (or "P/E") ratio of close to 32x in India, you could be forgiven for feeling indifferent about Cyient Limited's (NSE:CYIENT) P/E ratio of 30.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, Cyient has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Cyient

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

How Is Cyient's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Cyient's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. The latest three year period has also seen an excellent 86% overall rise in EPS, aided by its short-term performance. 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 18% per year over the next three years. With the market predicted to deliver 22% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Cyient'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.

The Key Takeaway

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.

Our examination of Cyient'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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Cyient is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Cyient. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com