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Saratov Oil Refinery (MCX:KRKN) shares have continued recent momentum with a 36% gain in the last month alone. Zooming out, the annual gain of 105% knocks our socks off.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
See our latest analysis for Saratov Oil Refinery
Does Saratov Oil Refinery Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 1.68 that sentiment around Saratov Oil Refinery isn't particularly high. We can see in the image below that the average P/E (6.1) for companies in the oil and gas industry is higher than Saratov Oil Refinery's P/E.
Its relatively low P/E ratio indicates that Saratov Oil Refinery shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. 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. 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. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Saratov Oil Refinery's earnings made like a rocket, taking off 249% last year. The sweetener is that the annual five year growth rate of 21% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. 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.