Those holding Om Metals Infraprojects (NSE:OMMETALS) shares must be pleased that the share price has rebounded 40% in the last thirty days. But unfortunately, the stock is still down by 11% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 38% 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). 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 Om Metals Infraprojects
How Does Om Metals Infraprojects's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.49 that sentiment around Om Metals Infraprojects isn't particularly high. If you look at the image below, you can see Om Metals Infraprojects has a lower P/E than the average (13.5) in the construction industry classification.
Om Metals Infraprojects's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. 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
If earnings fall then in the future the 'E' will be lower. That means even if the current P/E is low, it will increase over time if the share price stays flat. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Om Metals Infraprojects had pretty flat EPS growth in the last year. And it has shrunk its earnings per share by 6.6% per year over the last five years. So it would be surprising to see a high P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).