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How Does Bhartiya International's (NSE:BIL) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Bhartiya International (NSE:BIL) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month alone, although it is still down 27% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 36% 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

See our latest analysis for Bhartiya International

Does Bhartiya International Have A Relatively High Or Low P/E For Its Industry?

Bhartiya International has a P/E ratio of 9.87. The image below shows that Bhartiya International has a P/E ratio that is roughly in line with the luxury industry average (9.9).

NSEI:BIL Price Estimation Relative to Market, November 17th 2019

That indicates that the market expects Bhartiya International will perform roughly in line with other companies in its industry. The company could surprise by performing better than average, in the future. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

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. When earnings grow, the 'E' increases, over time. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. Then, a lower P/E should attract more buyers, pushing the share price up.

It's great to see that Bhartiya International grew EPS by 10% in the last year. And it has improved its earnings per share by 3.2% per year over the last three years. This could arguably justify a relatively high P/E ratio. In contrast, EPS has decreased by 2.1%, annually, over 5 years.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

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. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

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).

How Does Bhartiya International's Debt Impact Its P/E Ratio?

Bhartiya International has net debt worth a very significant 164% of its market capitalization. This level of debt justifies a relatively low P/E, so remain cognizant of the debt, if you're comparing it to other stocks.

The Bottom Line On Bhartiya International's P/E Ratio

Bhartiya International has a P/E of 9.9. That's below the average in the IN market, which is 13.1. While the EPS growth last year was strong, the significant debt levels reduce the number of options available to management. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What is very clear is that the market has become less pessimistic about Bhartiya International over the last month, with the P/E ratio rising from 7.4 back then to 9.9 today. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. 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. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

Of course you might be able to find a better stock than Bhartiya International. So you may wish to see this free collection of other companies that have grown earnings strongly.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.