Market Cool On IIFL Capital Services Limited's (NSE:IIFLSEC) Earnings Pushing Shares 27% Lower

To the annoyance of some shareholders, IIFL Capital Services Limited (NSE:IIFLSEC) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 68% in the last year.

Since its price has dipped substantially, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 32x, you may consider IIFL Capital Services as a highly attractive investment with its 11.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been quite advantageous for IIFL Capital Services as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for IIFL Capital Services

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on IIFL Capital Services will help you shine a light on its historical performance.

Is There Any Growth For IIFL Capital Services?

IIFL Capital Services' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 114% last year. Pleasingly, EPS has also lifted 167% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 26% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that IIFL Capital Services is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Having almost fallen off a cliff, IIFL Capital Services' share price has pulled its P/E way down as well. 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 IIFL Capital Services currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for IIFL Capital Services you should be aware of.

If these risks are making you reconsider your opinion on IIFL Capital 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.