Borosil Glass Works (NSE:BOROSIL) shareholders are no doubt pleased to see that the share price has had a great month, posting a 34% gain, recovering from prior weakness. 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. 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.
Check out our latest analysis for Borosil Glass Works
How Does Borosil Glass Works's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 35.66 that there is some investor optimism about Borosil Glass Works. You can see in the image below that the average P/E (21.9) for companies in the consumer durables industry is lower than Borosil Glass Works's P/E.
Borosil Glass Works's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Borosil Glass Works maintained roughly steady earnings over the last twelve months. But over the longer term (5 years) earnings per share have increased by 8.6%.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
Borosil Glass Works's Balance Sheet
Borosil Glass Works has net cash of ₹145m. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.