Insufficient Growth At Tata Consultancy Services Limited (NSE:TCS) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 22.4x Tata Consultancy Services Limited (NSE:TCS) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Tata Consultancy Services 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?

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

Retrospectively, the last year delivered a decent 5.7% gain to the company's bottom line. The latest three year period has also seen a 29% 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.

Turning to the outlook, the next three years should generate growth of 7.0% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

With this information, we can see why Tata Consultancy Services 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 Tata Consultancy Services' P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Tata Consultancy Services' 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tata Consultancy Services you should know about.

If these risks are making you reconsider your opinion on Tata Consultancy Services, 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.