Stock Analysis

Pinning Down Five-Star Business Finance Limited's (NSE:FIVESTAR) P/E Is Difficult Right Now

NSEI:FIVESTAR
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When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 21x, you may consider Five-Star Business Finance Limited (NSE:FIVESTAR) as a stock to potentially avoid with its 29.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Five-Star Business 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 Five-Star Business Finance

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NSEI:FIVESTAR Price Based on Past Earnings February 22nd 2023
Want the full picture on analyst estimates for the company? Then our free report on Five-Star Business Finance will help you uncover what's on the horizon.

How Is Five-Star Business Finance's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Five-Star Business Finance's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. Pleasingly, EPS has also lifted 97% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the lone analyst following the company. With the market predicted to deliver 25% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Five-Star Business Finance's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Our examination of Five-Star Business Finance's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Five-Star Business Finance is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

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 P/E ratio below 20x).

Valuation is complex, but we're helping make it simple.

Find out whether Five-Star Business Finance is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.