How Does RKEC Projects's (NSE:RKEC) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, RKEC Projects (NSE:RKEC) shares are down a considerable 33% in the last month. That drop has capped off a tough year for shareholders, with the share price down 39% in that time.

All else being equal, a share price drop should make a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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.

See our latest analysis for RKEC Projects

How Does RKEC Projects's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 3.16 that sentiment around RKEC Projects isn't particularly high. We can see in the image below that the average P/E (8.2) for companies in the construction industry is higher than RKEC Projects's P/E.

Its relatively low P/E ratio indicates that RKEC Projects shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, 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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, RKEC Projects grew EPS like Taylor Swift grew her fan base back in 2010; the 59% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 65% per year. So I'd be surprised if the P/E ratio was not above average.

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

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. 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.

RKEC Projects's Balance Sheet

Net debt is 26% of RKEC Projects's market cap. While it's worth keeping this in mind, it isn't a worry.

The Verdict On RKEC Projects's P/E Ratio

RKEC Projects trades on a P/E ratio of 3.2, which is below the IN market average of 10.9. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. Given RKEC Projects's P/E ratio has declined from 4.7 to 3.2 in the last month, we know for sure that the market is more worried about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for deep value investors this stock might justify some research.

When the market is wrong about a stock, it gives savvy investors an opportunity. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: RKEC Projects 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 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.