ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) Shares May Have Run Too Fast Too Soon

When close to half the companies in India have price-to-earnings ratios (or "P/E's") below 27x, you may consider ICICI Prudential Life Insurance Company Limited (NSE:ICICIPRULI) as a stock to avoid entirely with its 68.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Recent times have been advantageous for ICICI Prudential Life Insurance as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for ICICI Prudential Life Insurance

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line. As a result, it also grew EPS by 14% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's alarming that ICICI Prudential Life Insurance's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that ICICI Prudential Life 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with ICICI Prudential Life Insurance.

You might be able to find a better investment than ICICI Prudential Life Insurance. 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.