A Rising Share Price Has Us Looking Closely At R Systems International Limited's (NSE:RSYSTEMS) P/E Ratio
The R Systems International (NSE:RSYSTEMS) share price has done well in the last month, posting a gain of 31%. Unfortunately, the full year gain of 6.6% wasn't so sweet.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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. 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.
Check out our latest analysis for R Systems International
How Does R Systems International's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 10.35 that sentiment around R Systems International isn't particularly high. The image below shows that R Systems International has a lower P/E than the average (11.4) P/E for companies in the it industry.
Its relatively low P/E ratio indicates that R Systems International shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with R Systems International, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. 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.
In the last year, R Systems International grew EPS like Taylor Swift grew her fan base back in 2010; the 82% gain was both fast and well deserved. Having said that, the average EPS growth over the last three years wasn't so good, coming in at 2.9%. Regrettably, the longer term performance is poor, with EPS down 1.3% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
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. 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.
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).
How Does R Systems International's Debt Impact Its P/E Ratio?
R Systems International has net cash of ₹2.2b. This is fairly high at 37% of its market capitalization. That might mean balance sheet strength is important to the business, but should also help push the P/E a bit higher than it would otherwise be.
The Bottom Line On R Systems International's P/E Ratio
R Systems International trades on a P/E ratio of 10.4, which is below the IN market average of 13.5. Not only should the net cash position reduce risk, but the recent growth has been impressive. The relatively low P/E ratio implies the market is pessimistic. What we know for sure is that investors have become more excited about R Systems International recently, since they have pushed its P/E ratio from 7.9 to 10.4 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.
Investors have an opportunity when market expectations about a stock are wrong. 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. 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 R Systems International. 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.
