Getting In Cheap On SBFC Finance Limited (NSE:SBFC) Might Be Difficult

With a price-to-earnings (or "P/E") ratio of 35.4x SBFC Finance Limited (NSE:SBFC) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 27x and even P/E's lower than 15x 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 as high as it is.

We've discovered 1 warning sign about SBFC Finance. View them for free.

SBFC Finance 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for SBFC Finance

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, SBFC Finance would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The latest three year period has also seen an excellent 234% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

With this information, we can see why SBFC Finance is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On SBFC Finance's P/E

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.

As we suspected, our examination of SBFC Finance's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for SBFC Finance that you need to take into consideration.

If these risks are making you reconsider your opinion on SBFC Finance, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.