Hatsun Agro Product (NSE:HATSUNPP) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. However, the annual gain of 5.4% wasn't so impressive.
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). 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.
View our latest analysis for Hatsun Agro Product
Does Hatsun Agro Product Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 78.31 that there is some investor optimism about Hatsun Agro Product. As you can see below, Hatsun Agro Product has a much higher P/E than the average company (14.3) in the food industry.
That means that the market expects Hatsun Agro Product will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Notably, Hatsun Agro Product grew EPS by a whopping 29% in the last year. And it has bolstered its earnings per share by 10% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.