Prime Securities Limited's (NSE:PRIMESECU) Price Is Out Of Tune With Earnings

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 12x, you may consider Prime Securities Limited (NSE:PRIMESECU) as a stock to potentially avoid with its 15.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Prime Securities' financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Prime Securities

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

An inspection of average P/E's throughout Prime Securities' industry may help to explain its high P/E ratio. You'll notice in the figure below that P/E ratios in the Capital Markets industry are similar to the market. So it appears the company's ratio isn't really influenced by these industry numbers currently. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Capital Markets industry. Still, the strength of the company's earnings will most likely determine where its P/E shall sit.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Prime Securities' earnings, revenue and cash flow.

Does Growth Match The High P/E?

Prime Securities' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 53%. As a result, earnings from three years ago have also fallen 41% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to decline by 3.7% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's odd that Prime Securities' P/E sits above the majority of other companies. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Prime Securities' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Prime Securities currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Prime Securities is showing 4 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Prime Securities. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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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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