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Man Industries (India) (NSE:MANINDS) shareholders are no doubt pleased to see that the share price has had a great month, posting a 38% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 36% in the last year.
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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
See our latest analysis for Man Industries (India)
Does Man Industries (India) Have A Relatively High Or Low P/E For Its Industry?
Man Industries (India)'s P/E of 7.96 indicates relatively low sentiment towards the stock. The image below shows that Man Industries (India) has a lower P/E than the average (13.0) P/E for companies in the construction industry.
This suggests that market participants think Man Industries (India) will underperform other companies in its industry. Since the market seems unimpressed with Man Industries (India), it's quite possible it could surprise on the upside. 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
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Man Industries (India)'s earnings per share fell by 40% in the last twelve months. But EPS is up 33% over the last 5 years. And it has shrunk its earnings per share by 24% per year over the last three years. This might lead to low expectations.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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.