To the annoyance of some shareholders, Kuantum Papers (NSE:KUANTUM) shares are down a considerable in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.
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 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.
See our latest analysis for Kuantum Papers
Does Kuantum Papers Have A Relatively High Or Low P/E For Its Industry?
Kuantum Papers's P/E of 4.93 indicates relatively low sentiment towards the stock. We can see in the image below that the average P/E (9.3) for companies in the forestry industry is higher than Kuantum Papers's P/E.
Kuantum Papers's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Kuantum Papers, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. Earnings growth means that in the future the 'E' will be higher. 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.
Kuantum Papers's earnings per share grew by -4.8% in the last twelve months. And it has bolstered its earnings per share by 20% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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.