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To the annoyance of some shareholders, Somany Ceramics (NSE:SOMANYCERA) shares are down a considerable 32% in the last month. That drop has capped off a tough year for shareholders, with the share price down 51% in that time.
All else being equal, a share price drop should make a stock more attractive to potential investors. 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. 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.
See our latest analysis for Somany Ceramics
Does Somany Ceramics Have A Relatively High Or Low P/E For Its Industry?
Somany Ceramics has a P/E ratio of 18.36. You can see in the image below that the average P/E (18.4) for companies in the building industry is roughly the same as Somany Ceramics's P/E.
Its P/E ratio suggests that Somany Ceramics shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
When earnings fall, the 'E' decreases, over time. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Somany Ceramics saw earnings per share decrease by 37% last year. But EPS is up 5.3% over the last 5 years. And over the longer term (3 years) earnings per share have decreased 13% annually. This growth rate might warrant a low P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.