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

Unfortunately for some shareholders, the Transwarranty Finance (NSE:TFL) share price has dived 31% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 4.0% over that longer period.

All else being equal, a share price drop should make a stock more attractive to potential investors. 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Transwarranty Finance

Does Transwarranty Finance Have A Relatively High Or Low P/E For Its Industry?

Transwarranty Finance's P/E of 25.58 indicates some degree of optimism towards the stock. As you can see below, Transwarranty Finance has a higher P/E than the average company (18.4) in the diversified financial industry.

Its relatively high P/E ratio indicates that Transwarranty Finance shareholders think it will perform better than other companies in its industry classification.

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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Transwarranty Finance's earnings per share fell by 44% in the last twelve months.

Remember: P/E Ratios Don't Consider The Balance Sheet

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.

How Does Transwarranty Finance's Debt Impact Its P/E Ratio?

Net debt totals a substantial 120% of Transwarranty Finance's 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 Transwarranty Finance's P/E Ratio

Transwarranty Finance's P/E is 25.6 which is above average (14.2) in its market. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What can be absolutely certain is that the market has become significantly less optimistic about Transwarranty Finance over the last month, with the P/E ratio falling from 37.2 back then to 25.6 today. For those who don't like to trade against momentum, that could be a warning sign, but a contrarian investor might want to take a closer look.

Investors should be looking to buy stocks that the market is wrong about. 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.

But note: Transwarranty Finance 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).

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.

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. Thank you for reading.