Subdued Growth No Barrier To Nippon Life India Asset Management Limited's (NSE:NAM-INDIA) Price

With a price-to-earnings (or "P/E") ratio of 36.4x Nippon Life India Asset Management Limited (NSE:NAM-INDIA) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 32x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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 seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Nippon Life India Asset Management's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 48%. The latest three year period has also seen an excellent 67% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.9% each year over the next three years. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

In light of this, it's alarming that Nippon Life India Asset Management's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Nippon Life India Asset Management'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 Nippon Life India Asset Management currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Nippon Life India Asset Management.

Of course, you might also be able to find a better stock than Nippon Life India Asset Management. 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.