How Does Puravankara's (NSE:PURVA) P/E Compare To Its Industry, After Its Big Share Price Gain?

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Simply Wall St

Mon, Sep 23, 2019, 12:54 AM

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. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Puravankara

How Does Puravankara's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 12.98 that sentiment around Puravankara isn't particularly high. If you look at the image below, you can see Puravankara has a lower P/E than the average (16.5) in the real estate industry classification.

NSEI:PURVA Price Estimation Relative to Market, September 23rd 2019

Puravankara'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 Puravankara, 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

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Notably, Puravankara grew EPS by a whopping 35% in the last year. And earnings per share have improved by 42% annually, over the last three years. With that performance, I would expect it to have an above average P/E ratio. But earnings per share are down 2.6% per year over the last five years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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.

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).

How Does Puravankara's Debt Impact Its P/E Ratio?

Puravankara's net debt is considerable, at 161% of its market cap. This is a relatively high level of debt, so the stock probably deserves a relatively low P/E ratio. Keep that in mind when comparing it to other companies.

The Verdict On Puravankara's P/E Ratio

Puravankara's P/E is 13.0 which is about average (13.9) in the IN market. While it does have meaningful debt levels, it has also produced strong earnings growth recently. However, the P/E ratio implies that most doubt the strong growth will continue. What is very clear is that the market has become more optimistic about Puravankara over the last month, with the P/E ratio rising from 9.7 back then to 13.0 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Puravankara may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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