Some Shareholders Feeling Restless Over ICICI Lombard General Insurance Company Limited's (NSE:ICICIGI) P/E Ratio

ICICI Lombard General Insurance Company Limited's (NSE:ICICIGI) price-to-earnings (or "P/E") ratio of 50.2x might make it look like a sell right now compared to the market in India, where around half of the companies have P/E ratios below 34x and even P/E's below 19x are quite common. 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.

Recent times haven't been advantageous for ICICI Lombard General Insurance as its earnings have been rising slower than most other companies. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for ICICI Lombard General Insurance

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How Is ICICI Lombard General Insurance's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as ICICI Lombard General Insurance's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Pleasingly, EPS has also lifted 58% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 19% per annum over the next three years. With the market predicted to deliver 20% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that ICICI Lombard General Insurance's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware ICICI Lombard General Insurance is showing 1 warning sign in our investment analysis, you should know about.

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.