There's Reason For Concern Over SBI Life Insurance Company Limited's (NSE:SBILIFE) Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 16x, you may consider SBI Life Insurance Company Limited (NSE:SBILIFE) as a stock to avoid entirely with its 58.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The recent earnings growth at SBI Life Insurance would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for SBI Life Insurance

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on SBI Life Insurance will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, SBI Life Insurance would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 7.2% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 39% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 11% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that SBI Life Insurance's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From SBI Life Insurance's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that SBI Life Insurance currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for SBI Life Insurance with six simple checks will allow you to discover any risks that could be an issue.

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.

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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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