With a median price-to-earnings (or "P/E") ratio of close to 12x in India, you could be forgiven for feeling indifferent about Edelweiss Financial Services Limited's (NSE:EDELWEISS) P/E ratio of 12.9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Edelweiss Financial Services 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 moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
How Does Edelweiss Financial Services' P/E Ratio Compare To Its Industry Peers?
It's plausible that Edelweiss Financial Services' fairly average P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Capital Markets industry are also similar to the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. 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. We'd highlight though, the spotlight should be on the anticipated direction of the company's earnings.Keen to find out how analysts think Edelweiss Financial Services' future stacks up against the industry? In that case, our free report is a great place to start.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Edelweiss Financial Services' is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 28% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the four analysts covering the company suggest earnings growth will be highly resilient over the next year growing by 49%. Meanwhile, the broader market is forecast to contract by 4.5%, which would indicate the company is doing very well.
With this information, we find it odd that Edelweiss Financial Services is trading at a fairly similar P/E to the market. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader market.
The Final Word
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.
We've established that Edelweiss Financial Services currently trades on a lower than expected P/E since its growth forecasts are potentially beating a struggling market. When we see a superior earnings outlook with some actual growth, we assume potential risks are what might be placing pressure on the P/E ratio. One major risk is whether its earnings trajectory can keep outperforming under these tough market conditions. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You always need to take note of risks, for example - Edelweiss Financial Services has 5 warning signs we think you should be aware of.
If you're unsure about the strength of Edelweiss Financial Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
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