How Does Ujjivan Financial Services's (NSE:UJJIVAN) P/E Compare To Its Industry, After The Share Price Drop?
To the annoyance of some shareholders, Ujjivan Financial Services (NSE:UJJIVAN) shares are down a considerable 52% in the last month. That drop has capped off a tough year for shareholders, with the share price down 45% in that time.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Ujjivan Financial Services
How Does Ujjivan Financial Services's P/E Ratio Compare To Its Peers?
Ujjivan Financial Services's P/E of 5.84 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (11.5) for companies in the consumer finance industry is higher than Ujjivan Financial Services's P/E.
This suggests that market participants think Ujjivan Financial Services will underperform other companies in its industry. Since the market seems unimpressed with Ujjivan Financial Services, it's quite possible it could surprise on the upside. 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
Probably the most important factor in determining what P/E a company trades on is the earnings growth. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Ujjivan Financial Services's earnings made like a rocket, taking off 90% last year. The cherry on top is that the five year growth rate was an impressive 23% per year. So I'd be surprised if the P/E ratio was not above average.
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. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Ujjivan Financial Services's Balance Sheet
Ujjivan Financial Services's net debt is considerable, at 124% of its 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 Bottom Line On Ujjivan Financial Services's P/E Ratio
Ujjivan Financial Services's P/E is 5.8 which is below average (9.9) in the IN market. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What can be absolutely certain is that the market has become more pessimistic about Ujjivan Financial Services over the last month, with the P/E ratio falling from 12.2 back then to 5.8 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 have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
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.
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.
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