What Is SORIL Infra Resources's (NSE:SORILINFRA) P/E Ratio After Its Share Price Rocketed?

SORIL Infra Resources (NSE:SORILINFRA) shareholders are no doubt pleased to see that the share price has had a great month, posting a 38% gain, recovering from prior weakness. But that will do little to salve the savage burn caused by the 68% share price decline, over the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for SORIL Infra Resources

Does SORIL Infra Resources Have A Relatively High Or Low P/E For Its Industry?

SORIL Infra Resources's P/E of 15.90 indicates some degree of optimism towards the stock. As you can see below, SORIL Infra Resources has a higher P/E than the average company (10.1) in the commercial services industry.

That means that the market expects SORIL Infra Resources will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

SORIL Infra Resources's earnings per share fell by 23% in the last twelve months. And it has shrunk its earnings per share by 18% per year over the last five years. This could justify a pessimistic P/E.

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

The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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.

Is Debt Impacting SORIL Infra Resources's P/E?

SORIL Infra Resources has net debt worth a very significant 175% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On SORIL Infra Resources's P/E Ratio

SORIL Infra Resources's P/E is 15.9 which is above average (11.3) in its market. With meaningful debt and a lack of recent earnings growth, the market has high expectations that the business will earn more in the future. What is very clear is that the market has become more optimistic about SORIL Infra Resources over the last month, with the P/E ratio rising from 11.6 back then to 15.9 today. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: SORIL Infra Resources 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).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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.