Pinning Down Sanlam Limited's (JSE:SLM) P/E Is Difficult Right Now

When close to half the companies in South Africa have price-to-earnings ratios (or "P/E's") below 9x, you may consider Sanlam Limited (JSE:SLM) as a stock to avoid entirely with its 14.5x 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.

There hasn't been much to differentiate Sanlam's and the market's earnings growth lately. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Sanlam

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sanlam.

Is There Enough Growth For Sanlam?

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

Retrospectively, the last year delivered a decent 2.7% gain to the company's bottom line. The latest three year period has also seen an excellent 1,516% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be similar to the 13% each year growth forecast for the broader market.

In light of this, it's curious that Sanlam'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.

What We Can Learn From Sanlam's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Sanlam's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Sanlam that you should be aware of.

Of course, you might also be able to find a better stock than Sanlam. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com