How Does Emami Paper Mills's (NSE:EMAMIPAP) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Sat, Sep 28, 2019, 9:00 PM

Emami Paper Mills (NSE:EMAMIPAP) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 11% over the last quarter. Longer term shareholders are no doubt thankful for the recovery in the share price, since it's pretty much flat for the year, even after the recent pop.

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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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.

Check out our latest analysis for Emami Paper Mills

How Does Emami Paper Mills's P/E Ratio Compare To Its Peers?

Emami Paper Mills's P/E of 24.13 indicates some degree of optimism towards the stock. The image below shows that Emami Paper Mills has a higher P/E than the average (9.9) P/E for companies in the forestry industry.

NSEI:EMAMIPAP Price Estimation Relative to Market, September 29th 2019

Emami Paper Mills's P/E tells us that market participants think the company will perform better than its industry peers, going forward. 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

Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. 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.

Emami Paper Mills saw earnings per share decrease by 29% last year. But over the longer term (5 years) earnings per share have increased by 11%. And it has shrunk its earnings per share by 6.5% per year over the last three years. This might lead to low expectations.

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. 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).

Is Debt Impacting Emami Paper Mills's P/E?

Emami Paper Mills has net debt worth a very significant 261% of its market capitalization. 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 Verdict On Emami Paper Mills's P/E Ratio

Emami Paper Mills trades on a P/E ratio of 24.1, which is above its market average of 13.9. With significant debt and no EPS growth last year, shareholders are betting on an improvement in earnings from the company. What is very clear is that the market has become significantly more optimistic about Emami Paper Mills over the last month, with the P/E ratio rising from 18.5 back then to 24.1 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

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 be able to find a better stock than Emami Paper Mills. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.

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. Thank you for reading.

Terms and Privacy Policy

Your Privacy Choices

Utah Privacy Notice

More Info