PJSC Nizhnekamskshina (MCX:NKSH) shares have continued recent momentum with a 33% gain in the last month alone. That's tops off a massive gain of 143% 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). 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does PJSC Nizhnekamskshina Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 7.96 that sentiment around PJSC Nizhnekamskshina isn't particularly high. The image below shows that PJSC Nizhnekamskshina has a lower P/E than the average (11.6) P/E for companies in the auto components industry.
Its relatively low P/E ratio indicates that PJSC Nizhnekamskshina shareholders think it will struggle to do as well as other companies in its industry classification. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
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. Earnings growth means that in the future the 'E' will be higher. And in that case, the P/E ratio itself will drop rather quickly. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.
PJSC Nizhnekamskshina's earnings made like a rocket, taking off 393% last year. The cherry on top is that the five year growth rate was an impressive 53% per year. So I'd be surprised if the P/E ratio was not above average.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
PJSC Nizhnekamskshina's Balance Sheet
PJSC Nizhnekamskshina's net debt is 0.5% of its market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.
The Bottom Line On PJSC Nizhnekamskshina's P/E Ratio
PJSC Nizhnekamskshina has a P/E of 8.0. That's below the average in the RU market, which is 8.7. The company hasn't stretched its balance sheet, and earnings growth was good last year. If it continues to grow, then the current low P/E may prove to be unjustified. What we know for sure is that investors are becoming less uncomfortable about PJSC Nizhnekamskshina's prospects, since they have pushed its P/E ratio from 6.0 to 8.0 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. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. Although we don't have analyst forecasts you might want to assess this data-rich visualization of earnings, revenue and cash flow.
You might be able to find a better buy than PJSC Nizhnekamskshina. 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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