Sree Rayalaseema Hi-Strength Hypo (NSE:SRHHYPOLTD) shareholders are no doubt pleased to see that the share price has had a great month, posting a 31% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 19% 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. 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 Sree Rayalaseema Hi-Strength Hypo Have A Relatively High Or Low P/E For Its Industry?
Sree Rayalaseema Hi-Strength Hypo’s P/E is 11.35. You can see in the image below that the average P/E (12.0) for companies in the chemicals industry is roughly the same as Sree Rayalaseema Hi-Strength Hypo’s P/E.
Sree Rayalaseema Hi-Strength Hypo’s P/E tells us that market participants think its prospects are roughly in line with its industry. So if Sree Rayalaseema Hi-Strength Hypo actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the ‘E’ will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Sree Rayalaseema Hi-Strength Hypo’s earnings per share fell by 58% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 2.3%. And EPS is down 13% a year, over the last 3 years. This could justify a low P/E.
Remember: P/E Ratios Don’t Consider The Balance Sheet
Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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).
Sree Rayalaseema Hi-Strength Hypo’s Balance Sheet
Since Sree Rayalaseema Hi-Strength Hypo holds net cash of ₹148m, it can spend on growth, justifying a higher P/E ratio than otherwise.
The Bottom Line On Sree Rayalaseema Hi-Strength Hypo’s P/E Ratio
Sree Rayalaseema Hi-Strength Hypo has a P/E of 11.3. That’s below the average in the IN market, which is 14.0. The recent drop in earnings per share would make investors cautious, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there’s real potential that the low P/E could eventually indicate undervaluation. What is very clear is that the market has become more optimistic about Sree Rayalaseema Hi-Strength Hypo over the last month, with the P/E ratio rising from 8.7 back then to 11.3 today. 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 not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. We don’t have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Sree Rayalaseema Hi-Strength Hypo 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.