Bajaj Finance Limited's (NSE:BAJFINANCE) Shares Not Telling The Full Story

With a price-to-earnings (or "P/E") ratio of 26.4x Bajaj Finance Limited (NSE:BAJFINANCE) may be sending bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 31x and even P/E's higher than 58x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Bajaj Finance could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Bajaj Finance

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

How Is Bajaj Finance's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Bajaj Finance's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 15%. Pleasingly, EPS has also lifted 201% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 20% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% per year, which is not materially different.

With this information, we find it odd that Bajaj Finance is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

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.

Our examination of Bajaj Finance's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Bajaj Finance (2 are concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Bajaj Finance's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.