What Bajaj Finserv Ltd.'s (NSE:BAJAJFINSV) P/E Is Not Telling You

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 28x, you may consider Bajaj Finserv Ltd. (NSE:BAJAJFINSV) as a stock to potentially avoid with its 34.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Bajaj Finserv's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Bajaj Finserv

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Bajaj Finserv.

Is There Enough Growth For Bajaj Finserv?

In order to justify its P/E ratio, Bajaj Finserv would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. The latest three year period has also seen an excellent 89% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 18% per annum over the next three years. That's shaping up to be similar to the 19% each year growth forecast for the broader market.

With this information, we find it interesting that Bajaj Finserv is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Bajaj Finserv'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.

Our examination of Bajaj Finserv's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Bajaj Finserv that you should be aware of.

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.

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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.