How Does Surya Roshni’s (NSE:SURYAROSNI) P/E Compare To Its Industry, After The Share Price Drop?

To the annoyance of some shareholders, Surya Roshni (NSE:SURYAROSNI) shares are down a considerable 51% in the last month. Given the 68% 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. 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). 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 Surya Roshni

Does Surya Roshni Have A Relatively High Or Low P/E For Its Industry?

Surya Roshni’s P/E of 3.68 indicates relatively low sentiment towards the stock. The image below shows that Surya Roshni has a lower P/E than the average (7.2) P/E for companies in the metals and mining industry.

NSEI:SURYAROSNI Price Estimation Relative to Market, March 20th 2020
NSEI:SURYAROSNI Price Estimation Relative to Market, March 20th 2020

Its relatively low P/E ratio indicates that Surya Roshni shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. 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

Generally speaking the rate of earnings growth has a profound impact on a company’s P/E multiple. Earnings growth means that in the future the ‘E’ will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Surya Roshni saw earnings per share improve by 2.6% last year. And its annual EPS growth rate over 5 years is 12%.

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

It’s important to note that the P/E ratio considers the market capitalization, not the enterprise value. 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.

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.

How Does Surya Roshni’s Debt Impact Its P/E Ratio?

Surya Roshni’s net debt is considerable, at 224% of its market cap. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Surya Roshni’s P/E Ratio

Surya Roshni trades on a P/E ratio of 3.7, which is below the IN market average of 9.9. It’s good to see EPS growth in the last 12 months, but the debt on the balance sheet might be muting expectations. Given Surya Roshni’s P/E ratio has declined from 7.6 to 3.7 in the last month, we know for sure that the market is more worried about the business today, than it was back then. 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 the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don’t have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.

But note: Surya Roshni 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).

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.

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. Thank you for reading.