It's really great to see that even after a strong run, Mishra Dhatu Nigam (NSE:MIDHANI) shares have been powering on, with a gain of 30% in the last thirty days. And the full year gain of 43% isn't too shabby, either!

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. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Mishra Dhatu Nigam

How Does Mishra Dhatu Nigam's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 20.64 that there is some investor optimism about Mishra Dhatu Nigam. As you can see below, Mishra Dhatu Nigam has a higher P/E than the average company (8.4) in the metals and mining industry.

That means that the market expects Mishra Dhatu Nigam will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Mishra Dhatu Nigam increased earnings per share by an impressive 14% over the last twelve months. And it has bolstered its earnings per share by 9.5% per year over the last five years. With that performance, you might expect an above average 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. Thus, the metric does not reflect cash or debt held by the company. 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.

Is Debt Impacting Mishra Dhatu Nigam's P/E?

Since Mishra Dhatu Nigam holds net cash of ₹1.5b, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Mishra Dhatu Nigam's P/E Ratio

Mishra Dhatu Nigam's P/E is 20.6 which is above average (13.2) in its market. With cash in the bank the company has plenty of growth options -- and it is already on the right track. So it is not surprising the market is probably extrapolating recent growth well into the future, reflected in the relatively high P/E ratio. What we know for sure is that investors have become more excited about Mishra Dhatu Nigam recently, since they have pushed its P/E ratio from 15.9 to 20.6 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Mishra Dhatu Nigam. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.