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Those holding Elecon Engineering (NSE:ELECON) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 20% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 34% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. One way to gauge market expectations of a stock 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.
Check out our latest analysis for Elecon Engineering
Does Elecon Engineering Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 6.56 that sentiment around Elecon Engineering isn't particularly high. If you look at the image below, you can see Elecon Engineering has a lower P/E than the average (12.5) in the electrical industry classification.
Its relatively low P/E ratio indicates that Elecon Engineering shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
It's great to see that Elecon Engineering grew EPS by 22% in the last year. And earnings per share have improved by 35% annually, over the last five years. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.