Some Confidence Is Lacking In Nippon Life India Asset Management Limited (NSE:NAM-INDIA) As Shares Slide 25%

Nippon Life India Asset Management Limited (NSE:NAM-INDIA) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The last month has meant the stock is now only up 2.3% during the last year.

In spite of the heavy fall in price, there still wouldn't be many who think Nippon Life India Asset Management's price-to-earnings (or "P/E") ratio of 24.5x is worth a mention when the median P/E in India is similar at about 26x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Nippon Life India Asset Management certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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How Is Nippon Life India Asset Management's Growth Trending?

In order to justify its P/E ratio, Nippon Life India Asset Management would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. The latest three year period has also seen an excellent 78% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% over the next year. With the market predicted to deliver 26% growth , the company is positioned for a weaker earnings result.

In light of this, it's curious that Nippon Life India Asset Management's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Nippon Life India Asset Management's P/E?

Nippon Life India Asset Management's plummeting stock price has brought its P/E right back to the rest of the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Nippon Life India Asset Management currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Nippon Life India Asset Management that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.