How Does Welspun Investments and Commercials's (NSE:WELINV) P/E Compare To Its Industry, After Its Big Share Price Gain?

Welspun Investments and Commercials (NSE:WELINV) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. And the full year gain of 26% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less 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 deep value investors might steer clear when expectations of a company are too high. 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.

See our latest analysis for Welspun Investments and Commercials

Does Welspun Investments and Commercials Have A Relatively High Or Low P/E For Its Industry?

Welspun Investments and Commercials's P/E of 82.21 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (46.0) for companies in the retail distributors industry is lower than Welspun Investments and Commercials's P/E.

Its relatively high P/E ratio indicates that Welspun Investments and Commercials shareholders think it will perform better than other companies in its industry classification. 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Welspun Investments and Commercials increased earnings per share by a whopping 40% last year.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

Is Debt Impacting Welspun Investments and Commercials's P/E?

Welspun Investments and Commercials has net cash of ₹20m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Verdict On Welspun Investments and Commercials's P/E Ratio

Welspun Investments and Commercials's P/E is 82.2 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. The excess cash it carries is the gravy on top its fast EPS growth. So based on this analysis we'd expect Welspun Investments and Commercials to have a high P/E ratio. What we know for sure is that investors have become much more excited about Welspun Investments and Commercials recently, since they have pushed its P/E ratio from 61.6 to 82.2 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors should be looking to buy stocks that the market is wrong about. 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. We don't have analyst forecasts, but you might want to assess this data-rich visualization of earnings, revenue and cash flow.

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

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.