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How Does A and M Jumbo Bags's (NSE:AMJUMBO) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

A and M Jumbo Bags (NSE:AMJUMBO) shareholders are no doubt pleased to see that the share price has had a great month, posting a 35% gain, recovering from prior weakness. But shareholders may not all be feeling jubilant, since the share price is still down 22% 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. 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 A and M Jumbo Bags

How Does A and M Jumbo Bags's P/E Ratio Compare To Its Peers?

A and M Jumbo Bags's P/E is 6.73. The image below shows that A and M Jumbo Bags has a P/E ratio that is roughly in line with the packaging industry average (7.1).

NSEI:AMJUMBO Price Estimation Relative to Market, November 5th 2019

A and M Jumbo Bags's P/E tells us that market participants think its prospects are roughly in line with its industry. So if A and M Jumbo Bags actually outperforms its peers going forward, that should be a positive for the share price. I would further inform my view by checking insider buying and selling., among other things.

How Growth Rates Impact P/E Ratios

P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

In the last year, A and M Jumbo Bags grew EPS like Taylor Swift grew her fan base back in 2010; the 230% gain was both fast and well deserved. The cherry on top is that the five year growth rate was an impressive 120% per year. So I'd be surprised if the P/E ratio was not above average.

Remember: P/E Ratios Don't Consider The Balance Sheet

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. In theory, a company can lower its future P/E ratio by using cash or debt to invest in 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).

Is Debt Impacting A and M Jumbo Bags's P/E?

Net debt totals a substantial 116% of A and M Jumbo Bags's market cap. 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 Verdict On A and M Jumbo Bags's P/E Ratio

A and M Jumbo Bags trades on a P/E ratio of 6.7, which is below the IN market average of 13.4. The company has a meaningful amount of debt on the balance sheet, but that should not eclipse the solid earnings growth. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What we know for sure is that investors are becoming less uncomfortable about A and M Jumbo Bags's prospects, since they have pushed its P/E ratio from 5.0 to 6.7 over the last month. 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 should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.