BSE Limited's (NSE:BSE) Shareholders Might Be Looking For Exit

BSE Limited's (NSE:BSE) price-to-earnings (or "P/E") ratio of 15.3x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

BSE could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for BSE

How Does BSE's P/E Ratio Compare To Its Industry Peers?

It's plausible that BSE's high P/E ratio could be a result of tendencies within its own industry. It turns out the Capital Markets industry in general has a P/E ratio similar to the market, as the graphic below shows. So it appears the company's ratio isn't really influenced by these industry numbers currently. In the context of the Capital Markets industry's current setting, most of its constituents' P/E's would be expected to be held back. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.

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

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 11%. Regardless, EPS has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should bring plunging returns, with earnings decreasing 31% as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to moderate by 6.5%, which indicates the company should perform poorly indeed.

With this information, it's strange that BSE is trading at a higher P/E in comparison. When earnings shrink rapidly often the P/E premium shrinks too, which could set up shareholders for future disappointment. There's strong potential for the P/E to fall to lower levels if the company doesn't improve its profitability.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that BSE currently trades on a much higher than expected P/E since its earnings forecast is even worse than the struggling market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain this level of performance under these tough market conditions. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with BSE (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

When trading BSE or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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