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It's really great to see that even after a strong run, Best Efforts Bank (MCX:ALBK) shares have been powering on, with a gain of 39% in the last thirty days. Looking back a bit further, we're also happy to report the stock is up 92% in the last year.
All else being equal, a sharp share price increase should make a stock less 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 deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock 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.
Check out our latest analysis for Best Efforts Bank
How Does Best Efforts Bank's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 64.87 that there is some investor optimism about Best Efforts Bank. The image below shows that Best Efforts Bank has a significantly higher P/E than the average (20.8) P/E for companies in the capital markets industry.
That means that the market expects Best Efforts Bank will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. Then, a higher P/E might scare off shareholders, pushing the share price down.
It's great to see that Best Efforts Bank grew EPS by 21% in the last year. And it has bolstered its earnings per share by 20% per year over the last five years. With that performance, you might expect an above average P/E ratio. Unfortunately, earnings per share are down 6.6% a year, over 3 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. 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 Best Efforts Bank's Debt Impact Its P/E Ratio?
Best Efforts Bank has net cash of ₽2.4b. This is fairly high at 45% 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.