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How Does Solikamsk magnesium works's (MCX:MGNZ) P/E Compare To Its Industry, After Its Big Share Price Gain?

Simply Wall St

Solikamsk magnesium works (MCX:MGNZ) shares have continued recent momentum with a 31% gain in the last month alone. That brought the twelve month gain to a very sharp 75%.

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. 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.

View our latest analysis for Solikamsk magnesium works

Does Solikamsk magnesium works Have A Relatively High Or Low P/E For Its Industry?

Solikamsk magnesium works's P/E of 8.77 indicates some degree of optimism towards the stock. The image below shows that Solikamsk magnesium works has a higher P/E than the average (6.5) P/E for companies in the metals and mining industry.

MISX:MGNZ Price Estimation Relative to Market, January 28th 2020

That means that the market expects Solikamsk magnesium works will outperform other companies in its industry. Shareholders are clearly optimistic, but the future is always uncertain. So investors should delve deeper. I like to check if company insiders have been buying or selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. And in that case, the P/E ratio itself will drop rather quickly. Then, a lower P/E should attract more buyers, pushing the share price up.

In the last year, Solikamsk magnesium works grew EPS like Taylor Swift grew her fan base back in 2010; the 160% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 44% is also impressive. So I'd be surprised if the P/E ratio was not above average.

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. So it won't reflect the advantage of cash, or disadvantage of debt. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

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.

So What Does Solikamsk magnesium works's Balance Sheet Tell Us?

Solikamsk magnesium works has net debt worth just 3.6% of its market capitalization. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.

The Verdict On Solikamsk magnesium works's P/E Ratio

Solikamsk magnesium works trades on a P/E ratio of 8.8, which is fairly close to the RU market average of 8.7. When you consider the impressive EPS growth last year (along with some debt), it seems the market has questions about whether rapid EPS growth will be sustained. What we know for sure is that investors are becoming less uncomfortable about Solikamsk magnesium works's prospects, since they have pushed its P/E ratio from 6.7 to 8.8 over the last month. 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. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Solikamsk magnesium works may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.

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. Thank you for reading.