ICICI Lombard General Insurance Company Limited's (NSE:ICICIGI) Share Price Could Signal Some Risk

With a price-to-earnings (or "P/E") ratio of 35.5x ICICI Lombard General Insurance Company Limited (NSE:ICICIGI) may be sending bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 26x and even P/E's lower than 15x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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ICICI Lombard General Insurance 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.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 95% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is noticeably more attractive.

With this information, we find it concerning that ICICI Lombard General Insurance is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 ICICI Lombard General Insurance currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - ICICI Lombard General Insurance has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on ICICI Lombard General Insurance, 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.