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How Does Mishra Dhatu Nigam's (NSE:MIDHANI) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Mishra Dhatu Nigam (NSE:MIDHANI) shares have continued recent momentum with a 31% gain in the last month alone. And the full year gain of 33% isn't too shabby, either!

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

Check out our latest analysis for Mishra Dhatu Nigam

How Does Mishra Dhatu Nigam's P/E Ratio Compare To Its Peers?

Mishra Dhatu Nigam's P/E of 21.59 indicates some degree of optimism towards the stock. As you can see below, Mishra Dhatu Nigam has a higher P/E than the average company (8.4) in the metals and mining industry.

NSEI:MIDHANI Price Estimation Relative to Market, November 2nd 2019

Its relatively high P/E ratio indicates that Mishra Dhatu Nigam 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 delve deeper. I like to check if company insiders have been buying or selling.

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. 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. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Mishra Dhatu Nigam increased earnings per share by 4.1% 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

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. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

How Does Mishra Dhatu Nigam's Debt Impact Its P/E Ratio?

Mishra Dhatu Nigam has net cash of ₹1.0b. That should lead to a higher P/E than if it did have debt, because its strong balance sheets gives it more options.

The Bottom Line On Mishra Dhatu Nigam's P/E Ratio

Mishra Dhatu Nigam's P/E is 21.6 which is above average (13.4) in its market. EPS was up modestly better over the last twelve months. Also positive, the relatively strong balance sheet will allow for investment in growth -- and the P/E indicates shareholders that will happen! What we know for sure is that investors have become much more excited about Mishra Dhatu Nigam recently, since they have pushed its P/E ratio from 16.5 to 21.6 over the last month. 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.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. Although we don't have analyst forecasts shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

You might be able to find a better buy than Mishra Dhatu Nigam. 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.