To the annoyance of some shareholders, Capacit’e Infraprojects (NSE:CAPACITE) shares are down a considerable 31% in the last month. That drop has capped off a tough year for shareholders, with the share price down 47% in that time.
Assuming nothing else has changed, a lower share price makes a stock more 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. The implication here is that long term investors have an opportunity when expectations of a company are too low. 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 Capacit’e Infraprojects’s P/E Ratio Compare To Its Peers?
Capacit’e Infraprojects’s P/E of 7.68 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (11.6) for companies in the real estate industry is higher than Capacit’e Infraprojects’s P/E.
Its relatively low P/E ratio indicates that Capacit’e Infraprojects shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
When earnings fall, the ‘E’ decreases, over time. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
Most would be impressed by Capacit’e Infraprojects earnings growth of 18% in the last year. And its annual EPS growth rate over 5 years is 9.1%. With that performance, you might expect an above average P/E ratio.
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).
While growth expenditure doesn’t always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
How Does Capacit’e Infraprojects’s Debt Impact Its P/E Ratio?
Capacit’e Infraprojects has net cash of ₹4.1b. This is fairly high at 45% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On Capacit’e Infraprojects’s P/E Ratio
Capacit’e Infraprojects has a P/E of 7.7. That’s below the average in the IN market, which is 11.8. The net cash position gives plenty of options to the business, and the recent improvement in EPS is good to see. The relatively low P/E ratio implies the market is pessimistic. Since analysts are predicting growth will continue, one might expect to see a higher P/E so it may be worth looking closer What can be absolutely certain is that the market has become more pessimistic about Capacit’e Infraprojects over the last month, with the P/E ratio falling from 11.2 back then to 7.7 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.
Investors have an opportunity when market expectations about a stock are wrong. 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Capacit’e Infraprojects 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).
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.