There's Reason For Concern Over Sanlam Limited's (JSE:SLM) Price

With a median price-to-earnings (or "P/E") ratio of close to 10x in South Africa, you could be forgiven for feeling indifferent about Sanlam Limited's (JSE:SLM) P/E ratio of 10.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Sanlam has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See 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 Some Growth For Sanlam?

The only time you'd be comfortable seeing a P/E like Sanlam's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 48% last year. The latest three year period has also seen an excellent 119% overall rise in EPS, aided by its short-term performance. 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 2.5% per year as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

In light of this, it's curious that Sanlam's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

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

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.

Our examination of Sanlam's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Sanlam (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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.