In This Article:
I G Petrochemicals (NSE:IGPL) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 32% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 55% share price decline throughout the year.
Assuming no other changes, a sharply higher share price makes a stock less 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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Check out our latest analysis for I G Petrochemicals
Does I G Petrochemicals Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.49 that sentiment around I G Petrochemicals isn't particularly high. The image below shows that I G Petrochemicals has a lower P/E than the average (11.2) P/E for companies in the chemicals industry.
Its relatively low P/E ratio indicates that I G Petrochemicals 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. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
I G Petrochemicals saw earnings per share decrease by 39% last year. But EPS is up 33% over the last 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.