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Khadim India (NSE:KHADIM) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month alone, although it is still down 18% over the last quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 66% share price decline throughout the 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.
See our latest analysis for Khadim India
How Does Khadim India's P/E Ratio Compare To Its Peers?
Khadim India's P/E of 25.91 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (22.6) for companies in the specialty retail industry is lower than Khadim India's P/E.
Khadim India's P/E tells us that market participants think the company will perform better than its industry peers, going forward. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Companies that shrink earnings per share quickly will rapidly decrease the 'E' in the equation. That means even if the current P/E is low, it will increase over time if the share price stays flat. Then, a higher P/E might scare off shareholders, pushing the share price down.
Khadim India saw earnings per share decrease by 55% last year. And over the longer term (3 years) earnings per share have decreased 13% annually. This could justify a low P/E.
Remember: P/E Ratios Don't Consider The Balance Sheet
The 'Price' in P/E reflects the market capitalization of the company. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).