Investor Optimism Abounds Times Guaranty Limited (NSE:TIMESGTY) But Growth Is Lacking

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 12x, you may consider Times Guaranty Limited (NSE:TIMESGTY) as a stock to potentially avoid with its 15.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Times Guaranty's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Times Guaranty

How Does Times Guaranty's P/E Ratio Compare To Its Industry Peers?

An inspection of average P/E's throughout Times Guaranty's industry may help to explain its high P/E ratio. The image below shows that the Capital Markets industry as a whole also has a P/E ratio higher than the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Capital Markets industry. Nevertheless, the company's P/E should be primarily influenced by its own financial performance.

Although there are no analyst estimates available for Times Guaranty, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Times Guaranty's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 55%. As a result, earnings from three years ago have also fallen 68% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to decline by 7.4% over the next year, or less than the company's recent medium-term annualised earnings decline.

With this information, it's strange that Times Guaranty is trading at a higher P/E in comparison. In general, when earnings shrink rapidly the P/E premium often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Times Guaranty's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Times Guaranty currently trades on a much higher than expected P/E since its recent three-year earnings are even worse than the forecasts for a struggling market. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough market conditions. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Times Guaranty (of which 3 are significant!) you should know about.

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 P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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