Earnings Working Against PNB Housing Finance Limited's (NSE:PNBHOUSING) Share Price

PNB Housing Finance Limited's (NSE:PNBHOUSING) price-to-earnings (or "P/E") ratio of 10.6x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 27x and even P/E's above 50x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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PNB Housing Finance 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 degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for PNB Housing Finance

Keen to find out how analysts think PNB Housing Finance's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For PNB Housing Finance?

The only time you'd be truly comfortable seeing a P/E as depressed as PNB Housing Finance's is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The latest three year period has also seen an excellent 63% 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 twelve analysts covering the company suggest earnings should grow by 8.3% per annum over the next three years. With the market predicted to deliver 20% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that PNB Housing Finance's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of PNB Housing Finance's 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 PNB Housing Finance (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.