What Is Muthoot Capital Services's (NSE:MUTHOOTCAP) P/E Ratio After Its Share Price Rocketed?

Muthoot Capital Services (NSE:MUTHOOTCAP) shareholders are no doubt pleased to see that the share price has had a great month, posting a 55% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 43% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less 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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

View our latest analysis for Muthoot Capital Services

Does Muthoot Capital Services Have A Relatively High Or Low P/E For Its Industry?

Muthoot Capital Services's P/E is 11.04. You can see in the image below that the average P/E (10.7) for companies in the consumer finance industry is roughly the same as Muthoot Capital Services's P/E.

That indicates that the market expects Muthoot Capital Services will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Muthoot Capital Services shrunk earnings per share by 27% over the last year. But over the longer term (5 years) earnings per share have increased by 18%.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. That means it doesn't take debt or cash into account. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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).

How Does Muthoot Capital Services's Debt Impact Its P/E Ratio?

Muthoot Capital Services's net debt is considerable, at 285% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On Muthoot Capital Services's P/E Ratio

Muthoot Capital Services trades on a P/E ratio of 11.0, which is fairly close to the IN market average of 10.9. 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 we know for sure is that investors have become more excited about Muthoot Capital Services recently, since they have pushed its P/E ratio from 7.1 to 11.0 over the last month. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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.