Shriram Finance Limited's (NSE:SHRIRAMFIN) Price Is Right But Growth Is Lacking After Shares Rocket 25%

Shriram Finance Limited (NSE:SHRIRAMFIN) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 42%.

In spite of the firm bounce in price, Shriram Finance may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.9x, since almost half of all companies in India have P/E ratios greater than 28x and even P/E's higher than 52x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Shriram Finance has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 Shriram Finance

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shriram Finance.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Pleasingly, EPS has also lifted 86% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the analysts watching the company. With the market predicted to deliver 20% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Shriram Finance's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Shriram Finance's P/E

Shriram Finance's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Shriram Finance maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shriram Finance (of which 2 shouldn't be ignored!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.