Genpact Limited's (NYSE:G) Price Is Right But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 10.5x Genpact Limited (NYSE:G) may be sending bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 18x and even P/E's higher than 32x 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.

Recent times have been pleasing for Genpact as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 out of favour.

Check out our latest analysis for Genpact

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

How Is Genpact's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 61%. The latest three year period has also seen an excellent 94% overall rise in EPS, aided 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 slump, contracting by 2.7% each year during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 10% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Genpact's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

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.

We've established that Genpact maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Having said that, be aware Genpact is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

You might be able to find a better investment than Genpact. 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.