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IZMO (NSE:IZMO) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 26% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 54% share price decline throughout the year.
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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
View our latest analysis for IZMO
How Does IZMO's P/E Ratio Compare To Its Peers?
IZMO's P/E of 7.44 indicates relatively low sentiment towards the stock. The image below shows that IZMO has a lower P/E than the average (20.3) P/E for companies in the online retail industry.
IZMO's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Many investors like to buy stocks when the market is pessimistic about their prospects. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and 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. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
IZMO's earnings per share fell by 4.4% in the last twelve months. But over the longer term (3 years), earnings per share have increased by 46%.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Is Debt Impacting IZMO's P/E?
With net cash of ₹154m, IZMO has a very strong balance sheet, which may be important for its business. Having said that, at 35% of its market capitalization the cash hoard would contribute towards a higher P/E ratio.