A Rising Share Price Has Us Looking Closely At A2Z Infra Engineering Limited's (NSE:A2ZINFRA) P/E Ratio

The A2Z Infra Engineering (NSE:A2ZINFRA) share price has done well in the last month, posting a gain of 32%. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 63% share price decline throughout the year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for A2Z Infra Engineering

How Does A2Z Infra Engineering's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 0.26 that sentiment around A2Z Infra Engineering isn't particularly high. We can see in the image below that the average P/E (8.1) for companies in the construction industry is higher than A2Z Infra Engineering's P/E.

This suggests that market participants think A2Z Infra Engineering will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, A2Z Infra Engineering grew EPS like Taylor Swift grew her fan base back in 2010; the 69% gain was both fast and well deserved.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

How Does A2Z Infra Engineering's Debt Impact Its P/E Ratio?

A2Z Infra Engineering has net debt worth 52% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On A2Z Infra Engineering's P/E Ratio

A2Z Infra Engineering has a P/E of 0.3. That's below the average in the IN market, which is 11.1. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become less pessimistic about A2Z Infra Engineering over the last month, with the P/E ratio rising from 0.2 back then to 0.3 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: A2Z Infra Engineering may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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This article by Simply Wall St is general in nature. 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. Thank you for reading.