Benign Growth For HCL Technologies Limited (NSE:HCLTECH) Underpins Its Share Price

HCL Technologies Limited's (NSE:HCLTECH) price-to-earnings (or "P/E") ratio of 22.5x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 51x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

We've discovered 1 warning sign about HCL Technologies. View them for free.

Recent times haven't been advantageous for HCL Technologies as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for HCL Technologies

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HCL Technologies.

Is There Any Growth For HCL Technologies?

In order to justify its P/E ratio, HCL Technologies would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.7%. The latest three year period has also seen an excellent 36% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.9% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that HCL Technologies' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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.

As we suspected, our examination of HCL Technologies' 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. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for HCL Technologies that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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

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.