TELUS International (Cda) Inc. (NYSE:TIXT) shareholders that were waiting for something to happen have been dealt a blow with a 43% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 58% share price decline.

Since its price has dipped substantially, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may consider TELUS International (Cda) as an attractive investment with its 13.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for TELUS International (Cda) as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like TELUS International (Cda)'s 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 29%. The last three years don't look nice either as the company has shrunk EPS by 5.4% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 11% per annum during the coming three years according to the analysts following the company. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

In light of this, it's understandable that TELUS International (Cda)'s P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

TELUS International (Cda)'s P/E has taken a tumble along with its share price. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that TELUS International (Cda) maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 4 warning signs for TELUS International (Cda) (2 make us uncomfortable!) that you need to take into consideration.

If these risks are making you reconsider your opinion on TELUS International (Cda), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.