Investor Optimism Abounds Bajaj Finance Limited (NSE:BAJFINANCE) But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Bajaj Finance Limited (NSE:BAJFINANCE) as a stock to potentially avoid with its 34.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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There hasn't been much to differentiate Bajaj Finance's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Bajaj Finance

Want the full picture on analyst estimates for the company? Then our free report on Bajaj Finance will help you uncover what's on the horizon.

How Is Bajaj Finance's Growth Trending?

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

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Pleasingly, EPS has also lifted 130% 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 24% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 22% per annum growth forecast for the broader market.

With this information, we find it interesting that Bajaj Finance is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Bajaj Finance'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 Finance's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Bajaj Finance (2 make us uncomfortable!) that you should be aware of.

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

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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.