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

To the annoyance of some shareholders, Indiabulls Ventures (NSE:IBVENTURES) shares are down a considerable 33% in the last month. Given the 78% drop over the last year, some shareholders might be worried that they have become bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.

Assuming nothing else has changed, a lower share price makes a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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 Indiabulls Ventures

How Does Indiabulls Ventures's P/E Ratio Compare To Its Peers?

Indiabulls Ventures's P/E is 9.31. The image below shows that Indiabulls Ventures has a P/E ratio that is roughly in line with the capital markets industry average (9.6).

That indicates that the market expects Indiabulls Ventures will perform roughly in line with other companies in its industry. If the company has better than average prospects, then the market might be underestimating it. Checking factors such as director buying and selling. could help you form your own view on if that will happen.

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. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Indiabulls Ventures saw earnings per share decrease by 11% last year. But it has grown its earnings per share by 8.0% per year over the last five years.

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

Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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 Indiabulls Ventures's P/E?

Net debt totals a substantial 154% of Indiabulls Ventures's market cap. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Verdict On Indiabulls Ventures's P/E Ratio

Indiabulls Ventures has a P/E of 9.3. That's around the same as the average in the IN market, which is 9.9. With meaningful debt, and no earnings per share growth last year, even an average P/E indicates that the market a significant improvement from the business. What can be absolutely certain is that the market has become more pessimistic about Indiabulls Ventures over the last month, with the P/E ratio falling from 13.9 back then to 9.3 today. For those who prefer invest in growth, this stock apparently offers limited promise, but the deep value investors may find the pessimism around this stock enticing.

Investors should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

But note: Indiabulls Ventures 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).

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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.