Motilal Oswal Financial Services Limited (NSE:MOTILALOFS) Stock Catapults 27% Though Its Price And Business Still Lag The Market

Motilal Oswal Financial Services Limited (NSE:MOTILALOFS) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 198% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Motilal Oswal Financial Services as a highly attractive investment with its 14.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for Motilal Oswal Financial Services as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

Check out our latest analysis for Motilal Oswal Financial Services

Want the full picture on analyst estimates for the company? Then our free report on Motilal Oswal Financial Services will help you uncover what's on the horizon.

Is There Any Growth For Motilal Oswal Financial Services?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Motilal Oswal Financial Services' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 95%. The strong recent performance means it was also able to grow EPS by 112% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 2.5% per annum over the next three years. With the market predicted to deliver 20% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Motilal Oswal Financial Services' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Motilal Oswal Financial Services' recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Motilal Oswal Financial Services' analyst forecasts revealed that its outlook for shrinking earnings 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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Motilal Oswal Financial Services you should be aware of, and 1 of them is significant.

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.