Investors Aren't Entirely Convinced By EFC (I) Limited's (NSE:EFCIL) Earnings

EFC (I) Limited's (NSE:EFCIL) price-to-earnings (or "P/E") ratio of 20.3x might make it look like a buy right now compared to the market in India, where around half of the companies have P/E ratios above 28x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Recent times have been advantageous for EFC (I) as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for EFC (I)

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

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like EFC (I)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. The strong recent performance means it was also able to grow EPS by 3,526% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 52% per annum as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

In light of this, it's peculiar that EFC (I)'s P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On EFC (I)'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 EFC (I) currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for EFC (I) with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than EFC (I). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.