In This Article:
Malu Paper Mills (NSE:MALUPAPER) shareholders are no doubt pleased to see that the share price has had a great month, posting a 55% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 37% 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). 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). 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 Malu Paper Mills
How Does Malu Paper Mills's P/E Ratio Compare To Its Peers?
Malu Paper Mills's P/E of 7.85 indicates relatively low sentiment towards the stock. The image below shows that Malu Paper Mills has a lower P/E than the average (9.1) P/E for companies in the forestry industry.
This suggests that market participants think Malu Paper Mills will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
Malu Paper Mills's earnings made like a rocket, taking off 180% last year. The cherry on top is that the five year growth rate was an impressive 29% per year. So I'd be surprised if the P/E ratio was not above average.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.