Pinning Down Indian Railway Finance Corporation Limited's (NSE:IRFC) P/E Is Difficult Right Now

With a median price-to-earnings (or "P/E") ratio of close to 33x in India, you could be forgiven for feeling indifferent about Indian Railway Finance Corporation Limited's (NSE:IRFC) P/E ratio of 30.4x. 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.

Indian Railway Finance has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. 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 not quite in favour.

See our latest analysis for Indian Railway Finance

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 Indian Railway Finance's earnings, revenue and cash flow.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Indian Railway Finance's to be considered reasonable.

Retrospectively, the last year delivered a decent 7.1% gain to the company's bottom line. The solid recent performance means it was also able to grow EPS by 14% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Comparing that to the market, which is predicted to deliver 26% 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 Indian Railway Finance's 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. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Indian Railway Finance's P/E

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 Indian Railway Finance currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

It is also worth noting that we have found 2 warning signs for Indian Railway Finance (1 makes us a bit uncomfortable!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Indian Railway Finance. 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.