Unfortunately for some shareholders, the Indiabulls Ventures (NSE:IBVENTURES) share price has dived 31% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 76% share price decline, over the last year, has turned them into bagholders. For those wondering, a bagholder is someone who keeps holding a losing stock indefinitely, without taking the time to consider its prospects carefully, going forward.
All else being equal, a share price drop should make a stock more 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 long term investors have an opportunity when expectations of a company are too low. 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.
Does Indiabulls Ventures Have A Relatively High Or Low P/E For Its Industry?
Indiabulls Ventures's P/E is 14.78. You can see in the image below that the average P/E (14.7) for companies in the capital markets industry is roughly the same as Indiabulls Ventures's P/E.
Its P/E ratio suggests that Indiabulls Ventures shareholders think that in the future it will perform about the same as other companies in its industry classification. So if Indiabulls Ventures actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. 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.
It's nice to see that Indiabulls Ventures grew EPS by a stonking 36% in the last year. And earnings per share have improved by 13% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
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. 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.
How Does Indiabulls Ventures's Debt Impact Its P/E Ratio?
Net debt totals 68% of Indiabulls Ventures's market cap. This is enough debt that you'd have to make some adjustments before using the P/E ratio to compare it to a company with net cash.
The Bottom Line On Indiabulls Ventures's P/E Ratio
Indiabulls Ventures's P/E is 14.8 which is about average (13.9) in the IN market. The significant levels of debt do detract somewhat from the strong earnings growth. The P/E suggests the market isn't confident that growth will be sustained, though. Given Indiabulls Ventures's P/E ratio has declined from 21.3 to 14.8 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal 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. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
You might be able to find a better buy than Indiabulls Ventures. 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).
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