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It's great to see Reliance Industrial Infrastructure (NSE:RIIL) shareholders have their patience rewarded with a 38% share price pop in the last month. The bad news is that even after that recovery shareholders are still underwater by about 6.3% for the full 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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Reliance Industrial Infrastructure
Does Reliance Industrial Infrastructure Have A Relatively High Or Low P/E For Its Industry?
Reliance Industrial Infrastructure's P/E of 53.80 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (11.6) for companies in the oil and gas industry is a lot lower than Reliance Industrial Infrastructure's P/E.
That means that the market expects Reliance Industrial Infrastructure will outperform other companies in its industry. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
Reliance Industrial Infrastructure's earnings per share fell by 8.0% in the last twelve months. And it has shrunk its earnings per share by 17% per year over the last five years. So we might expect a relatively low P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. 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.