What Is Honda Siel Power Products's (NSE:HONDAPOWER) P/E Ratio After Its Share Price Rocketed?

Honda Siel Power Products (NSE:HONDAPOWER) shares have had a really impressive month, gaining 33%, after some slippage. And the full year gain of 14% isn't too shabby, either!

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). 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 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 Honda Siel Power Products

Does Honda Siel Power Products Have A Relatively High Or Low P/E For Its Industry?

We can tell from its P/E ratio of 14.49 that there is some investor optimism about Honda Siel Power Products. The image below shows that Honda Siel Power Products has a higher P/E than the average (11.6) P/E for companies in the machinery industry.

That means that the market expects Honda Siel Power Products 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

P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Notably, Honda Siel Power Products grew EPS by a whopping 26% in the last year. And earnings per share have improved by 19% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

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

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. That means it doesn't take debt or cash into account. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

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).

So What Does Honda Siel Power Products's Balance Sheet Tell Us?

Since Honda Siel Power Products holds net cash of ₹259m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Honda Siel Power Products's P/E Ratio

Honda Siel Power Products's P/E is 14.5 which is above average (11.3) in its market. With cash in the bank the company has plenty of growth options -- and it is already on the right track. Therefore it seems reasonable that the market would have relatively high expectations of the company What is very clear is that the market has become more optimistic about Honda Siel Power Products over the last month, with the P/E ratio rising from 10.9 back then to 14.5 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 have an opportunity when market expectations about a stock are wrong. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. 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 Honda Siel Power Products. 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.