Earnings Not Telling The Story For Sundaram Finance Limited (NSE:SUNDARMFIN)

With a median price-to-earnings (or "P/E") ratio of close to 35x in India, you could be forgiven for feeling indifferent about Sundaram Finance Limited's (NSE:SUNDARMFIN) P/E ratio of 32.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for Sundaram Finance as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Sundaram Finance

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

How Is Sundaram Finance's Growth Trending?

The only time you'd be comfortable seeing a P/E like Sundaram Finance's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 8.1%. EPS has also lifted 22% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 15% each year over the next three years. That's shaping up to be materially lower than the 21% per year growth forecast for the broader market.

In light of this, it's curious that Sundaram Finance's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From Sundaram Finance's P/E?

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 Sundaram Finance currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Sundaram Finance (2 are a bit unpleasant!) that we have uncovered.

You might be able to find a better investment than Sundaram Finance. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com