What IL&FS Investment Managers Limited's (NSE:IVC) 35% Share Price Gain Is Not Telling You

Despite an already strong run, IL&FS Investment Managers Limited (NSE:IVC) shares have been powering on, with a gain of 35% in the last thirty days. The last 30 days bring the annual gain to a very sharp 60%.

Following the firm bounce in price, IL&FS Investment Managers' price-to-earnings (or "P/E") ratio of 37.3x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 29x and even P/E's below 16x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Earnings have risen at a steady rate over the last year for IL&FS Investment Managers, which is generally not a bad outcome. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for IL&FS Investment Managers

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on IL&FS Investment Managers will help you shine a light on its historical performance.

Is There Enough Growth For IL&FS Investment Managers?

IL&FS Investment Managers' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 3.2%. This was backed up an excellent period prior to see EPS up by 72% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

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.

In light of this, it's alarming that IL&FS Investment Managers' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

IL&FS Investment Managers' P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that IL&FS Investment Managers currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for IL&FS Investment Managers (3 are a bit unpleasant) you should be aware of.

If these risks are making you reconsider your opinion on IL&FS Investment Managers, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.