Edelweiss Financial Services Limited (NSE:EDELWEISS) Surges 32% Yet Its Low P/E Is No Reason For Excitement

Edelweiss Financial Services Limited (NSE:EDELWEISS) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 66%.

Even after such a large jump in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 34x, you may still consider Edelweiss Financial Services as an attractive investment with its 28.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Edelweiss Financial Services as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Edelweiss Financial Services

Although there are no analyst estimates available for Edelweiss Financial Services, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as low as Edelweiss Financial Services' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 32% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's understandable that Edelweiss Financial Services' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

The latest share price surge wasn't enough to lift Edelweiss Financial Services' P/E close to the market median. 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.

As we suspected, our examination of Edelweiss Financial Services revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 5 warning signs for Edelweiss Financial Services you should be aware of, and 1 of them shouldn't be ignored.

If these risks are making you reconsider your opinion on Edelweiss Financial Services, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.