Indiabulls Housing Finance Limited (NSE:890192) Not Doing Enough For Some Investors As Its Shares Slump 25%

Indiabulls Housing Finance Limited (NSE:890192) shares have had a horrible month, losing 25% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

After such a large drop in price, Indiabulls Housing Finance may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.1x, since almost half of all companies in India have P/E ratios greater than 29x and even P/E's higher than 55x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

For instance, Indiabulls Housing Finance's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Indiabulls Housing Finance

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 Indiabulls Housing Finance's earnings, revenue and cash flow.

Is There Any Growth For Indiabulls Housing Finance?

In order to justify its P/E ratio, Indiabulls Housing Finance would need to produce anemic growth that's substantially trailing the market.

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 3.3%. As a result, earnings from three years ago have also fallen 35% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.

In light of this, it's understandable that Indiabulls Housing Finance's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Indiabulls Housing Finance's P/E?

Shares in Indiabulls Housing Finance have plummeted and its P/E is now low enough to touch the ground. 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 Indiabulls Housing Finance maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Indiabulls Housing Finance (at least 4 which are concerning), and understanding these should be part of your investment process.

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 low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.