To the annoyance of some shareholders, Apcotex Industries (NSE:APCOTEXIND) shares are down a considerable 33% in the last month. Indeed the recent decline has arguably caused some bitterness for shareholders who have held through the 47% drop over twelve months.
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. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
How Does Apcotex Industries’s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 17.73 that there is some investor optimism about Apcotex Industries. You can see in the image below that the average P/E (10.4) for companies in the chemicals industry is lower than Apcotex Industries’s P/E.
Apcotex Industries’s P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn’t guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the ‘E’ in the equation. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Apcotex Industries shrunk earnings per share by 33% over the last year. But it has grown its earnings per share by 5.0% per year over the last five years. And EPS is down 11% a year, over the last 3 years. This might lead to low expectations.
Don’t Forget: The P/E Does Not Account For Debt or Bank Deposits
The ‘Price’ in P/E reflects the market capitalization of the company. 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 Apcotex Industries’s Debt Impact Its P/E Ratio?
Net debt totals just 0.6% of Apcotex Industries’s market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Apcotex Industries’s P/E Ratio
Apcotex Industries has a P/E of 17.7. That’s higher than the average in its market, which is 12.5. With modest debt but no EPS growth in the last year, it’s fair to say the P/E implies some optimism about future earnings, from the market. Given Apcotex Industries’s P/E ratio has declined from 26.4 to 17.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course you might be able to find a better stock than Apcotex Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
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