Indbank Merchant Banking Services Limited's (NSE:INDBANK) 26% Dip In Price Shows Sentiment Is Matching Earnings

Indbank Merchant Banking Services Limited (NSE:INDBANK) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.

Since its price has dipped substantially, Indbank Merchant Banking Services' price-to-earnings (or "P/E") ratio of 15.7x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 51x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Indbank Merchant Banking Services recently, which is pleasing to see. It might be that many expect the respectable 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 Indbank Merchant Banking Services

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

Is There Any Growth For Indbank Merchant Banking Services?

Indbank Merchant Banking Services' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 39% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Indbank Merchant Banking Services is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The softening of Indbank Merchant Banking Services' shares means its P/E is now sitting at a pretty low level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Indbank Merchant Banking Services revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Indbank Merchant Banking Services that you should be aware of.

Of course, you might also be able to find a better stock than Indbank Merchant Banking Services. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.