Indbank Merchant Banking Services Limited's (NSE:INDBANK) Shares Climb 42% But Its Business Is Yet to Catch Up

Indbank Merchant Banking Services Limited (NSE:INDBANK) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

Although its price has surged higher, it's still not a stretch to say that Indbank Merchant Banking Services' price-to-earnings (or "P/E") ratio of 26.2x right now seems quite "middle-of-the-road" compared to the market in India, where the median P/E ratio is around 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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For instance, Indbank Merchant Banking Services' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Indbank Merchant Banking Services

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Indbank Merchant Banking Services' earnings, revenue and cash flow.

Is There Some Growth For Indbank Merchant Banking Services?

In order to justify its P/E ratio, Indbank Merchant Banking Services would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. Still, the latest three year period has seen an excellent 57% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Indbank Merchant Banking Services' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Indbank Merchant Banking Services appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Indbank Merchant Banking Services revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Indbank Merchant Banking Services is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

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 low P/E).

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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.