When nearly half of businesses in the United States have price-to-earnings (or “P / E”) ratios below 17x, you might consider TDCX inc. (NYSE: TDCX) as a stock to be avoided entirely with its P / E ratio of 36x. However, the P / E can be quite high for a reason and requires further investigation to determine if it is warranted.
TDCX has been doing a good job lately as its earnings have grown at a steady pace. One possibility is that the P / E is high as investors believe this respectable earnings growth will be enough to outperform the overall market in the near future. You really hope so, otherwise you are paying a pretty high price for no particular reason.
NYSE: TDCX price based on past earnings as of December 31, 2021
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Is there enough growth for TDCX?
In order to justify its P / E ratio, TDCX should produce exceptional growth well above that of the market.
In retrospect, last year generated an exceptional 23% gain in the company’s bottom line. Fortunately, BPA is also up 150% overall from three years ago, thanks to the last 12 months of growth. As a result, shareholders would likely have welcomed these earnings growth rates over the medium term.
This contrasts with the rest of the market, which is expected to grow 11% over the next year, significantly lower than the company’s recent mid-term annualized growth rates.
In light of this, it’s understandable that TDCX’s P / E is above the majority of other companies. Presumably, shareholders are unwilling to get rid of something that they believe will continue to outsmart the stock market.
The last word
It is argued that the price / earnings ratio is a lower measure of value in some industries, but it can be a powerful indicator of corporate sentiment.
As we suspected, our review of TDCX found that its three-year earnings trends are contributing to its high P / E, as they look better than current market expectations. Right now, shareholders are comfortable with the P / E because they are quite confident that earnings are not threatened. Unless recent medium-term conditions change, they will continue to provide strong support for the share price.
Before you decide, we discovered 3 warning signs for TDCX that you need to be aware of.
If these risks make you reconsider your opinion on TDCX, explore our interactive list of high-quality stocks to get a feel for what else is out there.
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