There wouldn't be many who think WNS (Holdings) Limited's (NYSE:WNS) price-to-earnings (or "P/E") ratio of 18.5x is worth a mention when the median P/E in the United States is similar at about 17x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, WNS (Holdings) has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
See our latest analysis for WNS (Holdings)
How Is WNS (Holdings)'s Growth Trending?
The only time you'd be comfortable seeing a P/E like WNS (Holdings)'s is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 59% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next three years should generate growth of 4.4% each year as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 12% per annum growth forecast for the broader market.
In light of this, it's curious that WNS (Holdings)'s P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Final Word
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.
We've established that WNS (Holdings) currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for WNS (Holdings) with six simple checks on some of these key factors.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.
