Hisar Metal Industries (NSE:HISARMET) shares have had a really impressive month, gaining 31%, after some slippage. But that gain wasn't enough to make shareholders whole, as the share price is still down 5.5% in the last 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 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.
View our latest analysis for Hisar Metal Industries
How Does Hisar Metal Industries's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 5.49 that sentiment around Hisar Metal Industries isn't particularly high. If you look at the image below, you can see Hisar Metal Industries has a lower P/E than the average (8.9) in the metals and mining industry classification.
This suggests that market participants think Hisar Metal Industries will underperform other companies in its industry. Since the market seems unimpressed with Hisar Metal Industries, 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
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 unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Hisar Metal Industries increased earnings per share by 3.8% last year. And it has bolstered its earnings per share by 40% per year over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.