How Does Vakrangee's (NSE:VAKRANGEE) P/E Compare To Its Industry, After Its Big Share Price Gain?

Vakrangee (NSE:VAKRANGEE) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month alone, although it is still down 47% over the last quarter. But that will do little to salve the savage burn caused by the 59% share price decline, over the last year.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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 Vakrangee

How Does Vakrangee's P/E Ratio Compare To Its Peers?

Vakrangee's P/E of 59.07 indicates some degree of optimism towards the stock. The image below shows that Vakrangee has a significantly higher P/E than the average (8.1) P/E for companies in the it industry.

That means that the market expects Vakrangee will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Vakrangee's earnings per share fell by 52% in the last twelve months. And it has shrunk its earnings per share by 32% per year over the last five years. This could justify a pessimistic P/E.

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

Don't forget that the P/E ratio considers market capitalization. So it won't reflect the advantage of cash, or disadvantage of debt. 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.

Vakrangee's Balance Sheet

Vakrangee has net cash of ₹12b. This is fairly high at 43% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.

The Bottom Line On Vakrangee's P/E Ratio

With a P/E ratio of 59.1, Vakrangee is expected to grow earnings very strongly in the years to come. The recent drop in earnings per share might keep value investors away, but the net cash position means the company has time to improve: and the high P/E suggests the market thinks it will. What we know for sure is that investors have become much more excited about Vakrangee recently, since they have pushed its P/E ratio from 43.5 to 59.1 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. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more 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.

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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