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Shilpa Medicare (NSE:SHILPAMED) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month alone, although it is still down 13% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 31% in the last year.
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). 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.
Check out our latest analysis for Shilpa Medicare
How Does Shilpa Medicare's P/E Ratio Compare To Its Peers?
Shilpa Medicare's P/E of 25.43 indicates some degree of optimism towards the stock. You can see in the image below that the average P/E (16.1) for companies in the pharmaceuticals industry is lower than Shilpa Medicare's P/E.
Its relatively high P/E ratio indicates that Shilpa Medicare shareholders think it will perform better than other companies in its industry classification. Shareholders are clearly optimistic, but the future is always uncertain. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. 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.
Shilpa Medicare saw earnings per share decrease by 21% last year. But EPS is up 1.7% over the last 5 years. And EPS is down 4.5% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
The 'Price' in P/E reflects the market capitalization of the company. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Such spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.