Benign Growth For PTC India Financial Services Limited (NSE:PFS) Underpins Its Share Price

PTC India Financial Services Limited's (NSE:PFS) price-to-earnings (or "P/E") ratio of 8.1x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 13x and even P/E's above 30x 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 limited.

As an illustration, earnings have deteriorated at India Financial Services over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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.

See our latest analysis for India Financial Services

Does India Financial Services Have A Relatively High Or Low P/E For Its Industry?

It's plausible that India Financial Services' low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Capital Markets industry are similar to the market. So unfortunately this doesn't provide a lot to explain the company's ratio right now. In the context of the Capital Markets industry's current setting, most of its constituents' P/E's would be expected to be held up. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on India Financial Services' earnings, revenue and cash flow.

Is There Any Growth For India Financial Services?

The only time you'd be truly comfortable seeing a P/E as low as India Financial Services' is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. The last three years don't look nice either as the company has shrunk EPS by 71% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to decline by 6.5% over the next year, or less than the company's recent medium-term annualised earnings decline.

In light of this, it's understandable that India Financial Services' P/E sits below the majority of other companies. Nonetheless, with earnings going quickly in reverse, it's not guaranteed that the P/E has found a floor yet. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability, which would be difficult to do with the current market outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of India Financial Services revealed its sharp three-year contraction in earnings is contributing to its low P/E, given the market is set to shrink less severely. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. However, we're still cautious about the company's ability to prevent an acceleration of its recent medium-term course and resist even greater pain to its business from the broader market turmoil. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 5 warning signs for India Financial Services (1 is a bit unpleasant!) that you need to take into consideration.

If you're unsure about the strength of India 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. 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.
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