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Murudeshwar Ceramics (NSE:MURUDCERA) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 6.4% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 43% 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. 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). A high P/E implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
View our latest analysis for Murudeshwar Ceramics
Does Murudeshwar Ceramics Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 20.34 that there is some investor optimism about Murudeshwar Ceramics. As you can see below, Murudeshwar Ceramics has a higher P/E than the average company (17.9) in the building industry.
Its relatively high P/E ratio indicates that Murudeshwar Ceramics shareholders think it will perform better than other companies in its industry classification. 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
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. 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.
Murudeshwar Ceramics shrunk earnings per share by 8.6% last year. But it has grown its earnings per share by 26% per year over the last five years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.