Investors Still Waiting For A Pull Back In Cholamandalam Investment and Finance Company Limited (NSE:CHOLAFIN)

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 29x, you may consider Cholamandalam Investment and Finance Company Limited (NSE:CHOLAFIN) as a stock to potentially avoid with its 34.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Cholamandalam Investment and Finance certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Cholamandalam Investment and Finance

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Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. The latest three year period has also seen an excellent 124% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the analysts watching the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Cholamandalam Investment and Finance's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Cholamandalam Investment and Finance's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Cholamandalam Investment and Finance's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 6 warning signs for Cholamandalam Investment and Finance (4 are significant!) that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.