Indbank Merchant Banking Services Limited's (NSE:INDBANK) Share Price Could Signal Some Risk

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 11x, you may consider Indbank Merchant Banking Services Limited (NSE:INDBANK) as a stock to potentially avoid with its 16.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Earnings have risen firmly for Indbank Merchant Banking Services recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

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

The only time you'd be truly comfortable seeing a P/E as high as Indbank Merchant Banking Services' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 61% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 2.8% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's odd that Indbank Merchant Banking Services' P/E sits above the majority of other companies. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Indbank Merchant Banking Services' P/E

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.

We've established that Indbank Merchant Banking Services currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. When we see below average earnings, we suspect the share price is at risk of declining, sending the high P/E lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader market turmoil. Unless the company's relative performance improves markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Indbank Merchant Banking Services is showing 5 warning signs in our investment analysis, and 2 of those can't be ignored.

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).

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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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