Unpleasant Surprises Could Be In Store For Bajaj Finance Limited's (NSE:BAJFINANCE) Shares

With a price-to-earnings (or "P/E") ratio of 32.4x Bajaj Finance Limited (NSE:BAJFINANCE) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 26x and even P/E's lower than 15x are not unusual. 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.

With earnings growth that's inferior to most other companies of late, Bajaj Finance has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See 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.

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Pleasingly, EPS has also lifted 161% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 24% over the next year. With the market predicted to deliver 25% growth , the company is positioned for a comparable earnings result.

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.

The Bottom Line On Bajaj Finance's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Bajaj Finance currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Bajaj Finance (1 can't be ignored!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.