Those holding NOCIL (NSE:NOCIL) shares must be pleased that the share price has rebounded 32% in the last thirty days. But unfortunately, the stock is still down by 11% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 36% 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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.
Does NOCIL Have A Relatively High Or Low P/E For Its Industry?
NOCIL's P/E is 10.38. You can see in the image below that the average P/E (11.2) for companies in the chemicals industry is roughly the same as NOCIL's P/E.
That indicates that the market expects NOCIL will perform roughly in line with other companies in its industry. So if NOCIL actually outperforms its peers going forward, that should be a positive for the share price. Checking factors such as director buying and selling. could help you form your own view on if that will happen.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. 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.
NOCIL's earnings per share fell by 4.4% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 47%.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
Don't forget that the P/E ratio considers market capitalization. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Theoretically, a business can improve its earnings (and produce a lower P/E in the future) by investing in growth. That means taking on debt (or spending its cash).
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).
NOCIL's Balance Sheet
The extra options and safety that comes with NOCIL's ₹1.4b net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.
The Bottom Line On NOCIL's P/E Ratio
NOCIL has a P/E of 10.4. That's below the average in the IN market, which is 13.9. Falling earnings per share are likely to be keeping potential buyers away, the relatively strong balance sheet will allow the company time to invest in growth. If it achieves that, then there's real potential that the low P/E could eventually indicate undervaluation. What is very clear is that the market has become more optimistic about NOCIL over the last month, with the P/E ratio rising from 7.8 back then to 10.4 today. 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.
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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
But note: NOCIL 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).
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 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.