What Is Indian Railway Catering & Tourism's (NSE:IRCTC) P/E Ratio After Its Share Price Rocketed?

Indian Railway Catering & Tourism (NSE:IRCTC) shares have continued recent momentum with a 55% gain in the last month alone. Longer term shareholders are no doubt thankful for the recovery in the share price, since it's pretty much flat for the year, even after the recent pop.

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). 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.

View our latest analysis for Indian Railway Catering & Tourism

How Does Indian Railway Catering & Tourism's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 58.50 that there is some investor optimism about Indian Railway Catering & Tourism. As you can see below, Indian Railway Catering & Tourism has a much higher P/E than the average company (13.3) in the commercial services industry.

Its relatively high P/E ratio indicates that Indian Railway Catering & Tourism 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. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Indian Railway Catering & Tourism's earnings made like a rocket, taking off 64% last year. The cherry on top is that the five year growth rate was an impressive 27% per year. So I'd be surprised if the P/E ratio was not above average.

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. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

Indian Railway Catering & Tourism's Balance Sheet

Indian Railway Catering & Tourism has net cash of ₹12b. 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 Indian Railway Catering & Tourism's P/E Ratio

Indian Railway Catering & Tourism's P/E is 58.5 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. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What we know for sure is that investors have become much more excited about Indian Railway Catering & Tourism recently, since they have pushed its P/E ratio from 37.7 to 58.5 over the last month. 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. 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.

You might be able to find a better buy than Indian Railway Catering & Tourism. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.