Indiabulls Ventures (NSE:IBVENTUREPP) shareholders are no doubt pleased to see that the share price has bounced 32% in the last month alone, although it is still down 49% over the last quarter. But that will do little to salve the savage burn caused by the 81% share price decline, over the last year.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
How Does Indiabulls Ventures’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 11.74 that there is some investor optimism about Indiabulls Ventures. As you can see below, Indiabulls Ventures has a higher P/E than the average company (10.7) in the capital markets industry.
Its relatively high P/E ratio indicates that Indiabulls Ventures shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn’t guarantee future growth. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. Earnings growth means that in the future the ‘E’ will be higher. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Indiabulls Ventures saw earnings per share decrease by 11% last year. But it has grown its earnings per share by 8.0% per year over the last five years.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.
Is Debt Impacting Indiabulls Ventures’s P/E?
Indiabulls Ventures has net debt worth a very significant 115% of its market capitalization. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.
The Bottom Line On Indiabulls Ventures’s P/E Ratio
Indiabulls Ventures has a P/E of 11.7. That’s higher than the average in its market, which is 10.9. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What is very clear is that the market has become more optimistic about Indiabulls Ventures over the last month, with the P/E ratio rising from 8.9 back then to 11.7 today. For those who prefer to invest with the flow of momentum, that might mean it’s time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
But note: Indiabulls Ventures 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.