How Does Shakti Pumps (India)'s (NSE:SHAKTIPUMP) P/E Compare To Its Industry, After Its Big Share Price Gain?

Those holding Shakti Pumps (India) (NSE:SHAKTIPUMP) shares must be pleased that the share price has rebounded 33% in the last thirty days. But unfortunately, the stock is still down by 5.2% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 35% in the last year.

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. 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.

Check out our latest analysis for Shakti Pumps (India)

How Does Shakti Pumps (India)'s P/E Ratio Compare To Its Peers?

Shakti Pumps (India)'s P/E of 16.20 indicates some degree of optimism towards the stock. As you can see below, Shakti Pumps (India) has a higher P/E than the average company (14.8) in the machinery industry.

Its relatively high P/E ratio indicates that Shakti Pumps (India) shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Shakti Pumps (India)'s earnings per share fell by 29% in the last twelve months. But EPS is up 11% over the last 3 years.

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

Don't forget that the P/E ratio considers market capitalization. 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.

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.

How Does Shakti Pumps (India)'s Debt Impact Its P/E Ratio?

Shakti Pumps (India)'s net debt equates to 32% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.

The Bottom Line On Shakti Pumps (India)'s P/E Ratio

Shakti Pumps (India) trades on a P/E ratio of 16.2, which is above its market average of 13.8. With modest debt but no EPS growth in the last year, it's fair to say the P/E implies some optimism about future earnings, from the market. What we know for sure is that investors have become more excited about Shakti Pumps (India) recently, since they have pushed its P/E ratio from 12.2 to 16.2 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.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. 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.

You might be able to find a better buy than Shakti Pumps (India). 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 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.

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.