IIFL Capital Services Limited's (NSE:IIFLCAPS) Shares Leap 27% Yet They're Still Not Telling The Full Story
IIFL Capital Services Limited (NSE:IIFLCAPS) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.
Although its price has surged higher, IIFL Capital Services' price-to-earnings (or "P/E") ratio of 21x might still 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 26x and even P/E's above 50x 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 limited.
As an illustration, earnings have deteriorated at IIFL Capital Services over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
See our latest analysis for IIFL Capital Services
How Is IIFL Capital Services' Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like IIFL Capital Services' to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. Still, the latest three year period has seen an excellent 114% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
This is in contrast to the rest of the market, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that IIFL Capital Services is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From IIFL Capital Services' P/E?
Despite IIFL Capital Services' shares building up a head of steam, its P/E still lags most other companies. 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 IIFL Capital Services currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
You always need to take note of risks, for example - IIFL Capital Services has 1 warning sign we think you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.