There wouldn't be many who think Sify Technologies Limited's (NASDAQ:SIFY) price-to-earnings (or "P/E") ratio of 16.2x 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.
Sify Technologies could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
Does Sify Technologies Have A Relatively High Or Low P/E For Its Industry?
We'd like to see if P/E's within Sify Technologies' industry might provide some colour around the company's fairly average P/E ratio. It turns out the Telecom industry in general has a P/E ratio lower than the market, as the graphic below shows. So it appears the company's ratio isn't really influenced by these industry numbers currently. In the context of the Telecom industry's current setting, most of its constituents' P/E's would be expected to be toned down. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.
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How Is Sify Technologies' Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Sify Technologies' 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 8.8%. Even so, admirably EPS has lifted 36% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next year should bring plunging returns, with earnings decreasing 38% as estimated by the only analyst watching the company. Meanwhile, the broader market is forecast to moderate by 10%, which indicates the company should perform poorly indeed.
With this information, it's perhaps strange that Sify Technologies is trading at a fairly similar P/E in comparison. With earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to lower levels if the company doesn't improve its profitability.
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.
Our examination of Sify Technologies' analyst forecasts revealed that its even shakier outlook against the market isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook, we suspect the share price is at risk of declining, sending the moderate P/E lower. In addition, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. Unless the company's prospects improve, it's challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 3 warning signs for Sify Technologies you should be aware of, and 1 of them makes us a bit uncomfortable.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
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.
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