Technocraft Industries (India) (NSE:TIIL) shares have had a really impressive month, gaining 38%, after some slippage. But shareholders may not all be feeling jubilant, since the share price is still down 27% in the last year.
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). 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 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.
How Does Technocraft Industries (India)'s P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 8.71 that sentiment around Technocraft Industries (India) isn't particularly high. We can see in the image below that the average P/E (13.4) for companies in the machinery industry is higher than Technocraft Industries (India)'s P/E.
Its relatively low P/E ratio indicates that Technocraft Industries (India) 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. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Technocraft Industries (India)'s earnings per share were pretty steady over the last year. But EPS is up 10% over the last 5 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. That means it doesn't take debt or cash into account. 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).
Technocraft Industries (India)'s Balance Sheet
Technocraft Industries (India)'s net debt equates to 48% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Bottom Line On Technocraft Industries (India)'s P/E Ratio
Technocraft Industries (India) has a P/E of 8.7. That's below the average in the IN market, which is 13.9. The company does have a little debt, and EPS is moving in the right direction. The P/E ratio implies the market is cautious about longer term prospects. What we know for sure is that investors are becoming less uncomfortable about Technocraft Industries (India)'s prospects, since they have pushed its P/E ratio from 6.3 to 8.7 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.
When the market is wrong about a stock, it gives savvy investors an opportunity. 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 shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
Of course you might be able to find a better stock than Technocraft Industries (India). So you may wish to see this free collection of other companies that have grown earnings strongly.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.