Second Generating Company of the Electric Power Wholesale Market (MCX:OGKB) shareholders are no doubt pleased to see that the share price has had a great month, posting a 30% gain, recovering from prior weakness. And the full year gain of 49% isn't too shabby, either!

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. One way to gauge market expectations of a stock 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 Second Generating Company of the Electric Power Wholesale Market

Does Second Generating Company of the Electric Power Wholesale Market Have A Relatively High Or Low P/E For Its Industry?

Second Generating Company of the Electric Power Wholesale Market's P/E of 5.41 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Second Generating Company of the Electric Power Wholesale Market has a lower P/E than the average (25.7) in the renewable energy industry classification.

Its relatively low P/E ratio indicates that Second Generating Company of the Electric Power Wholesale Market shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. You 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. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Second Generating Company of the Electric Power Wholesale Market increased earnings per share by a whopping 43% last year. And its annual EPS growth rate over 3 years is 55%. With that performance, I would expect it to have an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.

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.

Is Debt Impacting Second Generating Company of the Electric Power Wholesale Market's P/E?

Net debt totals 78% of Second Generating Company of the Electric Power Wholesale Market's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Second Generating Company of the Electric Power Wholesale Market's P/E Ratio

Second Generating Company of the Electric Power Wholesale Market trades on a P/E ratio of 5.4, which is below the RU market average of 7.8. The company may have significant debt, but EPS growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What is very clear is that the market has become less pessimistic about Second Generating Company of the Electric Power Wholesale Market over the last month, with the P/E ratio rising from 4.2 back then to 5.4 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

Of course you might be able to find a better stock than Second Generating Company of the Electric Power Wholesale Market. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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