Texas Instruments Incorporated's (NASDAQ:TXN) Share Price Not Quite Adding Up

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Texas Instruments Incorporated (NASDAQ:TXN) as a stock to avoid entirely with its 31.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Texas Instruments has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Texas Instruments

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

How Is Texas Instruments' Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. The last three years don't look nice either as the company has shrunk EPS by 3.5% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.9% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 10% each year growth forecast for the broader market.

In light of this, it's alarming that Texas Instruments' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

What We Can Learn From Texas Instruments' 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.

We've established that Texas Instruments currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Texas Instruments (of which 1 is potentially serious!) you should know about.

Of course, you might also be able to find a better stock than Texas Instruments. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com