To the annoyance of some shareholders, IIFL Securities (NSE:IIFLSEC) shares are down a considerable in the last month. The bad news is that the recent drop obliterated the last year's worth of gains; the stock is flat over twelve months.
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 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 IIFL Securities
Does IIFL Securities Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 5.47 that sentiment around IIFL Securities isn't particularly high. We can see in the image below that the average P/E (14.7) for companies in the capital markets industry is higher than IIFL Securities's P/E.
IIFL Securities's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with IIFL Securities, it's quite possible it could surprise on the upside. 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 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.
IIFL Securities shrunk earnings per share by 5.3% last year. And over the longer term (5 years) earnings per share have decreased 1.1% annually. So it would be surprising to see a high P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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.