Beta Drugs (NSE:BETA) shares have had a really impressive month, gaining 32%, after some slippage. That brought the twelve month gain to a very sharp 51%.
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. 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.
How Does Beta Drugs's P/E Ratio Compare To Its Peers?
Beta Drugs's P/E of 8.93 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Beta Drugs has a lower P/E than the average (15.2) in the pharmaceuticals industry classification.
Its relatively low P/E ratio indicates that Beta Drugs shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Beta Drugs, 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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that Beta Drugs grew EPS by a stonking 26% in the last year. And it has improved its earnings per share by 15% per year over the last three years. I'd therefore be a little surprised if its P/E ratio was not relatively high.
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. So it won't reflect the advantage of cash, or disadvantage of debt. 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).
How Does Beta Drugs's Debt Impact Its P/E Ratio?
Net debt totals 18% of Beta Drugs's market cap. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.
The Bottom Line On Beta Drugs's P/E Ratio
Beta Drugs's P/E is 8.9 which is below average (13.0) in the IN market. The EPS growth last year was strong, and debt levels are quite reasonable. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue. What we know for sure is that investors are becoming less uncomfortable about Beta Drugs's prospects, since they have pushed its P/E ratio from 6.7 to 8.9 over the last month. 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 should be looking to buy stocks that the market is wrong about. If it is underestimating a company, investors can make money by buying and holding the shares until the market corrects itself. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.
You might be able to find a better buy than Beta Drugs. 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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