How Does Dishman Carbogen Amcis's (NSE:DCAL) P/E Compare To Its Industry, After The Share Price Drop?

Unfortunately for some shareholders, the Dishman Carbogen Amcis (NSE:DCAL) share price has dived 35% in the last thirty days. Given the 69% drop over the last year, some shareholders might be worried that they have become bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. Perhaps the simplest way to get a read on investors' expectations of a business 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.

View our latest analysis for Dishman Carbogen Amcis

Does Dishman Carbogen Amcis Have A Relatively High Or Low P/E For Its Industry?

Dishman Carbogen Amcis's P/E of 5.80 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (22.5) for companies in the life sciences industry is higher than Dishman Carbogen Amcis's P/E.

This suggests that market participants think Dishman Carbogen Amcis will underperform other companies in its industry. Since the market seems unimpressed with Dishman Carbogen Amcis, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.

Dishman Carbogen Amcis shrunk earnings per share by 1.3% last year. But over the longer term (3 years), earnings per share have increased by 13%.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).

Dishman Carbogen Amcis's Balance Sheet

Net debt totals 66% of Dishman Carbogen Amcis's market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Bottom Line On Dishman Carbogen Amcis's P/E Ratio

Dishman Carbogen Amcis's P/E is 5.8 which is below average (11.7) in the IN market. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. Given Dishman Carbogen Amcis's P/E ratio has declined from 8.9 to 5.8 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

Of course you might be able to find a better stock than Dishman Carbogen Amcis. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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