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How Does Indiabulls Ventures's (NSE:IBVENTURES) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Those holding Indiabulls Ventures (NSE:IBVENTURES) shares must be pleased that the share price has rebounded 35% in the last thirty days. But unfortunately, the stock is still down by 35% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 69% share price decline throughout the 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. One way to gauge market expectations of a stock 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 Indiabulls Ventures

How Does Indiabulls Ventures's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 17.02 that there is some investor optimism about Indiabulls Ventures. The image below shows that Indiabulls Ventures has a higher P/E than the average (13.8) P/E for companies in the capital markets industry.

NSEI:IBVENTURES Price Estimation Relative to Market, November 10th 2019

Its relatively high P/E ratio indicates that Indiabulls Ventures shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. 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

Earnings growth rates have a big influence on P/E ratios. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Indiabulls Ventures increased earnings per share by 4.4% last year. And earnings per share have improved by 11% annually, over the last five years.

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

Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. 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.

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).

Indiabulls Ventures's Balance Sheet

Indiabulls Ventures has net debt worth 66% of its market capitalization. This is a reasonably significant level of debt -- all else being equal you'd expect a much lower P/E than if it had net cash.

The Bottom Line On Indiabulls Ventures's P/E Ratio

Indiabulls Ventures's P/E is 17.0 which is above average (13.4) in its market. With significant debt and fairly modest EPS growth last year, shareholders are betting on sustained improvement. What is very clear is that the market has become more optimistic about Indiabulls Ventures over the last month, with the P/E ratio rising from 12.6 back then to 17.0 today. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Indiabulls Ventures. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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.