Five-Star Business Finance Limited (NSE:FIVESTAR) shares have had a horrible month, losing 25% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 17% in that time.

Although its price has dipped substantially, Five-Star Business Finance may still be sending bullish signals at the moment with its price-to-earnings (or “P/E”) ratio of 15.6x, since almost half of all companies in India have P/E ratios greater than 29x and even P/E’s higher than 55x are not unusual. 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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Five-Star Business Finance certainly has been doing a good job lately as it’s been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Five-Star Business Finance

If you’d like to see what analysts are forecasting going forward, you should check out our free report on Five-Star Business Finance.

Is There Any Growth For Five-Star Business Finance?

In order to justify its P/E ratio, Five-Star Business Finance would need to produce sluggish growth that’s trailing the market.

Retrospectively, the last year delivered an exceptional 20% gain to the company’s bottom line. Pleasingly, EPS has also lifted 116% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 18% per year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 20% each year, which is noticeably more attractive.

In light of this, it’s understandable that Five-Star Business Finance’s P/E sits below the majority of other companies. Apparently many shareholders weren’t comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Five-Star Business Finance’s recently weak share price has pulled its P/E below most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Five-Star Business Finance’s analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. It’s hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Five-Star Business Finance (1 is potentially serious!) that you need to take into consideration.

If you’re unsure about the strength of Five-Star Business Finance’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.