HBL Power Systems (NSE:HBLPOWER) shareholders are no doubt pleased to see that the share price has bounced 50% in the last month alone, although it is still down 7.5% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 29% in the last year.
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 HBL Power Systems
How Does HBL Power Systems's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 21.04 that there is some investor optimism about HBL Power Systems. The image below shows that HBL Power Systems has a higher P/E than the average (12.9) P/E for companies in the electrical industry.
Its relatively high P/E ratio indicates that HBL Power Systems shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So further research is always essential. I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. 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. Then, a lower P/E should attract more buyers, pushing the share price up.
HBL Power Systems shrunk earnings per share by 12% over the last year. But over the longer term (3 years), earnings per share have increased by 19%. And EPS is down 8.6% a year, over the last 5 years. This growth rate might warrant a below average P/E ratio.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
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.