Risks Still Elevated At These Prices As Indbank Merchant Banking Services Limited (NSE:INDBANK) Shares Dive 26%

The Indbank Merchant Banking Services Limited (NSE:INDBANK) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 49%, which is great even in a bull market.

Even after such a large drop in price, Indbank Merchant Banking Services may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.9x, since almost half of all companies in India have P/E ratios under 16x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, Indbank Merchant Banking Services' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See 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.

How Is Indbank Merchant Banking Services' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.9%. This means it has also seen a slide in earnings over the longer-term as EPS is down 64% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 11% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Indbank Merchant Banking Services is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

A significant share price dive has done very little to deflate Indbank Merchant Banking Services' very lofty P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Indbank Merchant Banking Services currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Indbank Merchant Banking Services (2 don't sit too well with us!) that you should be aware of before investing here.

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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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