LTIMindtree Limited's (NSE:LTIM) Shares May Have Run Too Fast Too Soon

With a price-to-earnings (or "P/E") ratio of 33.2x LTIMindtree Limited (NSE:LTIM) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's inferior to most other companies of late, LTIMindtree has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for LTIMindtree

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

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.3% last year. EPS has also lifted 15% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 19% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that LTIMindtree is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are 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 LTIMindtree's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with LTIMindtree.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.