Earnings Working Against Mahindra & Mahindra Financial Services Limited's (NSE:M&MFIN) Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may consider Mahindra & Mahindra Financial Services Limited (NSE:M&MFIN) as an attractive investment with its 19.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Mahindra & Mahindra Financial Services' earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Mahindra & Mahindra Financial Services

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mahindra & Mahindra Financial Services.

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

The only time you'd be truly comfortable seeing a P/E as low as Mahindra & Mahindra Financial Services' is when the company's growth is on track to lag 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 5.6%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% per annum over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Mahindra & Mahindra Financial Services' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Mahindra & Mahindra Financial Services' 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.

As we suspected, our examination of Mahindra & Mahindra Financial Services' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Mahindra & Mahindra Financial Services (1 is potentially serious!) that you should be aware of before investing here.

If you're unsure about the strength of Mahindra & Mahindra Financial Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.