Gati (NSE:GATI) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month alone, although it is still down 20% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 40% 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). 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.
Does Gati Have A Relatively High Or Low P/E For Its Industry?
Gati's P/E of 40.10 indicates some degree of optimism towards the stock. As you can see below, Gati has a higher P/E than the average company (17.8) in the logistics industry.
That means that the market expects Gati 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
If earnings fall then in the future the 'E' will be lower. Therefore, even if you pay a low multiple of earnings now, that multiple will become higher in the future. Then, a higher P/E might scare off shareholders, pushing the share price down.
Gati's earnings per share fell by 36% in the last twelve months. And over the longer term (5 years) earnings per share have decreased 21% annually. This could justify a pessimistic P/E.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
The 'Price' in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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.
Gati's Balance Sheet
Gati's net debt equates to 30% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Gati's P/E Ratio
Gati has a P/E of 40.1. That's higher than the average in its market, which is 13.6. With some debt but no EPS growth last year, the market has high expectations of future profits. What we know for sure is that investors have become much more excited about Gati recently, since they have pushed its P/E ratio from 30.7 to 40.1 over the last month. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.
Of course you might be able to find a better stock than Gati. So you may wish to see this free collection of other companies that have grown earnings strongly.
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