Investors Don't See Light At End Of PNB Housing Finance Limited's (NSE:PNBHOUSING) Tunnel

With a price-to-earnings (or "P/E") ratio of 12x PNB Housing Finance Limited (NSE:PNBHOUSING) may be sending very bullish signals at the moment, given that almost half of all companies in India have P/E ratios greater than 29x and even P/E's higher than 54x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

PNB Housing Finance could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is PNB Housing Finance's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like PNB Housing Finance's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.0% gain to the company's bottom line. Pleasingly, EPS has also lifted 56% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 13% during the coming year according to the seven analysts following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

With this information, we can see why PNB Housing Finance is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that PNB Housing Finance maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for PNB Housing Finance that you need to be mindful of.

If you're unsure about the strength of PNB Housing Finance's 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. 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.