Those holding Oswal Greentech (NSE:BINDALAGRO) shares must be pleased that the share price has rebounded 43% in the last thirty days. But unfortunately, the stock is still down by 14% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 40% 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). The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
Does Oswal Greentech Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 5.11 that sentiment around Oswal Greentech isn't particularly high. If you look at the image below, you can see Oswal Greentech has a lower P/E than the average (16.5) in the real estate industry classification.
Its relatively low P/E ratio indicates that Oswal Greentech shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Notably, Oswal Greentech grew EPS by a whopping 30% in the last year. And its annual EPS growth rate over 3 years is 16%. I'd therefore be a little surprised if its P/E ratio was not relatively high. In contrast, EPS has decreased by 2.0%, annually, over 5 years.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. That means it doesn't take debt or cash into account. 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.
Oswal Greentech's Balance Sheet
The extra options and safety that comes with Oswal Greentech's ₹132m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Verdict On Oswal Greentech's P/E Ratio
Oswal Greentech's P/E is 5.1 which is below average (13.9) in the IN market. Not only should the net cash position reduce risk, but the recent growth has been impressive. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What is very clear is that the market has become less pessimistic about Oswal Greentech over the last month, with the P/E ratio rising from 3.6 back then to 5.1 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 have an opportunity when market expectations about a stock are wrong. 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.
You might be able to find a better buy than Oswal Greentech. 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 email@example.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.