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Avadh Sugar & Energy (NSE:AVADHSUGAR) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 17% over the last quarter. The full year gain of 44% is pretty reasonable, too.
Assuming no other changes, a sharply higher share price makes a stock less 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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for Avadh Sugar & Energy
Does Avadh Sugar & Energy Have A Relatively High Or Low P/E For Its Industry?
Avadh Sugar & Energy's P/E of 5.35 indicates relatively low sentiment towards the stock. The image below shows that Avadh Sugar & Energy has a lower P/E than the average (14.9) P/E for companies in the food industry.
This suggests that market participants think Avadh Sugar & Energy will underperform other companies in its industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.
Avadh Sugar & Energy increased earnings per share by an impressive 21% over the last twelve months.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. 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.