The Tata Power Company Limited's (NSE:TATAPOWER) Share Price Not Quite Adding Up

It's not a stretch to say that The Tata Power Company Limited's (NSE:TATAPOWER) price-to-earnings (or "P/E") ratio of 28.7x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

There hasn't been much to differentiate Tata Power's and the market's earnings growth lately. The P/E is probably moderate because investors think this modest earnings performance will continue. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

View our latest analysis for Tata Power

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

Is There Some Growth For Tata Power?

The only time you'd be comfortable seeing a P/E like Tata Power's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow EPS by 122% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 6.1% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is noticeably more attractive.

With this information, we find it interesting that Tata Power is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Tata Power's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Tata Power's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Tata Power that we have uncovered.

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).

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.