Cognizant Technology Solutions Corporation (NASDAQ:CTSH)'s price is not in line with its earnings.

Given that nearly half of U.S. companies have a price-to-earnings ratio (or “P/E”) of less than 16 times, you may want to consider the following. Cognizant Technology Solutions, Inc. (NASDAQ:CTSH) is a stock to avoid due to its P/E ratio of 18.4x. Nevertheless, we need to dig a little deeper to determine whether there's a rational basis for the P/E increase.

Cognizant Technology Solutions has been underperforming, with earnings lagging behind recent market expectations. One possibility is that the P/E ratio is high because investors think the company will completely turn things around and accelerate past most other companies on the market. If you don't hope so, you will end up paying a very high price for no particular reason.

Check out our latest analysis for Cognizant Technology Solutions.

If you want to know what analysts are predicting for the future, check out this article. free Report on Cognizant Technology Solutions.

Does growth equate to a high P/E ratio?

For a P/E ratio like Cognizant Technology Solutions to be considered reasonable, there is an inherent assumption that a company must outperform the market.

Looking back at last year's earnings, unfortunately the company's profit decreased by 4.8%. Still, despite his unsatisfying short-term performance, in his most recent three-year period he has seen an impressive overall EPS increase of 66%. Shareholders would therefore have liked to see continued performance, but would probably welcome medium-term profit growth.

Looking to the future, the analysts covering the company estimate that revenue should grow 9.5% annually over the next three years. Meanwhile, the rest of the market is projected to grow at an annualized rate of 11%, which is not significantly different.

With this in mind, it's interesting to see Cognizant Technology Solutions' P/E ratio higher than most other companies. Most investors seem to be willing to pay for exposure to the stock, ignoring fairly average growth expectations. However, this level of earnings growth will likely ultimately weigh on the stock price, so further gains will be difficult to achieve.

What can we learn from Cognizant Technology Solutions' P/E?

It has been argued that the price-to-earnings ratio is a poor measure of value in certain industries, but can be a powerful indicator of business confidence.

An examination of analyst forecasts for Cognizant Technology Solutions reveals that the company's market-aligned earnings outlook doesn't have as much of an impact on the company's high P/E ratio as we expected. Looking at the average earnings outlook with market-like growth, we think there is a risk that the stock price will fall, and the high P/E ratio will decline. Unless this situation improves, it is difficult to accept this price as reasonable.

A company's balance sheet is another important area of ​​risk analysis.take a look at ours free Cognizant Technology Solutions' Balance Sheet Analysis performs six simple checks on some of these important factors.

If you are interested in P/E ratioyou might want to see this free A collection of other companies with high 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.