Indian Energy Exchange (NSE:IEX) shares have continued recent momentum with a 32% gain in the last month alone. The full year gain of 14% is pretty reasonable, too.
All else being equal, a sharp share price increase should make a stock less 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). 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.
Does Indian Energy Exchange Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 32.98 that there is some investor optimism about Indian Energy Exchange. The image below shows that Indian Energy Exchange has a higher P/E than the average (13.0) P/E for companies in the capital markets industry.
Indian Energy Exchange’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn’t guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
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. If earnings are growing quickly, then the ‘E’ in the equation will increase faster than it would otherwise. 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.
Most would be impressed by Indian Energy Exchange earnings growth of 12% in the last year. And its annual EPS growth rate over 5 years is 14%. So one might expect an above average P/E ratio.
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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
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.
Indian Energy Exchange’s Balance Sheet
The extra options and safety that comes with Indian Energy Exchange’s ₹3.4b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On Indian Energy Exchange’s P/E Ratio
Indian Energy Exchange trades on a P/E ratio of 33.0, which is above its market average of 13.8. Its strong balance sheet gives the company plenty of resources for extra growth, and it has already proven it can grow. Therefore it seems reasonable that the market would have relatively high expectations of the company What we know for sure is that investors have become much more excited about Indian Energy Exchange recently, since they have pushed its P/E ratio from 25.0 to 33.0 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is ‘blood in the streets’, then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth — so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
You might be able to find a better buy than Indian Energy Exchange. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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