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Investor Optimism Abounds Accenture plc (NYSE:ACN) But Growth Is Lacking

Simply Wall St

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Accenture plc's (NYSE:ACN) price-to-earnings (or "P/E") ratio of 28.5x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Accenture as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Accenture

Does Accenture Have A Relatively High Or Low P/E For Its Industry?

An inspection of average P/E's throughout Accenture's industry may help to explain its particularly high P/E ratio. It turns out the IT industry in general also has a P/E ratio significantly higher than the market, as the graphic below shows. So this certainly goes a fair way towards explaining the company's ratio right now. Some industry P/E's don't move around a lot and right now most companies within the IT industry should be getting a strong boost. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

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

Is There Enough Growth For Accenture?

The only time you'd be truly comfortable seeing a P/E as steep as Accenture's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 6.8% each year as estimated by the analysts watching the company. With the market predicted to deliver 10.0% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Accenture is trading at a P/E higher than the market. 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.

The Final Word

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 Accenture currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Accenture that you should be aware of.

Of course, you might also be able to find a better stock than Accenture. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

This article by Simply Wall St is general in nature. 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.