U.S. Markets closed

A Rising Share Price Has Us Looking Closely At Omax Autos Limited's (NSE:OMAXAUTO) P/E Ratio

Simply Wall St

Omax Autos (NSE:OMAXAUTO) shares have continued recent momentum with a 32% gain in the last month alone. But shareholders may not all be feeling jubilant, since the share price is still down 38% in the last year.

Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. While the market sentiment towards a stock is very changeable, in the long run, the share price will tend to move in the same direction as earnings per share. 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). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Omax Autos

Does Omax Autos Have A Relatively High Or Low P/E For Its Industry?

Omax Autos's P/E of 3.78 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Omax Autos has a lower P/E than the average (14.4) in the auto components industry classification.

NSEI:OMAXAUTO Price Estimation Relative to Market, November 1st 2019

Its relatively low P/E ratio indicates that Omax Autos 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

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. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Omax Autos's earnings per share fell by 2.2% in the last twelve months. But it has grown its earnings per share by 54% per year over the last three years.

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. 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.

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.

Omax Autos's Balance Sheet

Omax Autos has net debt worth a very significant 162% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Bottom Line On Omax Autos's P/E Ratio

Omax Autos's P/E is 3.8 which is below average (13.4) in the IN market. When you consider that the company has significant debt, and didn't grow EPS last year, it isn't surprising that the market has muted expectations. What is very clear is that the market has become less pessimistic about Omax Autos over the last month, with the P/E ratio rising from 2.9 back then to 3.8 today. 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.

Investors have an opportunity when market expectations about a stock are wrong. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. Although we don't have analyst forecasts 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 Omax Autos. So you may wish to see this free collection of other companies that have grown earnings strongly.

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 editorial-team@simplywallst.com. 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.