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A Rising Share Price Has Us Looking Closely At Accelya Solutions India Limited's (NSE:ACCELYA) P/E Ratio

Simply Wall St

It's really great to see that even after a strong run, Accelya Solutions India (NSE:ACCELYA) shares have been powering on, with a gain of 32% in the last thirty days. The full year gain of 16% is pretty reasonable, too.

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. So some would prefer to hold off buying when there is a lot of optimism towards a stock. 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 ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See our latest analysis for Accelya Solutions India

How Does Accelya Solutions India's P/E Ratio Compare To Its Peers?

Accelya Solutions India's P/E of 14.18 indicates some degree of optimism towards the stock. The image below shows that Accelya Solutions India has a higher P/E than the average (11.1) P/E for companies in the it industry.

NSEI:ACCELYA Price Estimation Relative to Market, November 15th 2019

Its relatively high P/E ratio indicates that Accelya Solutions India shareholders think it will perform better than other companies in its industry classification. Clearly the market expects growth, but it isn't guaranteed. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. When earnings grow, the 'E' increases, over time. That means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

Accelya Solutions India increased earnings per share by a whopping 29% last year. And it has bolstered its earnings per share by 6.3% per year over the last five years. With that performance, I would expect it to have an above average P/E ratio.

Remember: P/E Ratios Don't Consider The Balance Sheet

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.

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.

So What Does Accelya Solutions India's Balance Sheet Tell Us?

The extra options and safety that comes with Accelya Solutions India's ₹382m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

The Verdict On Accelya Solutions India's P/E Ratio

Accelya Solutions India's P/E is 14.2 which is about average (13.2) in the IN market. With a strong balance sheet combined with recent growth, the P/E implies the market is quite pessimistic. What we know for sure is that investors have become more excited about Accelya Solutions India recently, since they have pushed its P/E ratio from 10.7 to 14.2 over the last month. 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

You might be able to find a better buy than Accelya Solutions India. 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).

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.