U.S. Markets closed

A Rising Share Price Has Us Looking Closely At Bliss GVS Pharma Limited's (NSE:BLISSGVS) P/E Ratio

Simply Wall St

Those holding Bliss GVS Pharma (NSE:BLISSGVS) shares must be pleased that the share price has rebounded 31% in the last thirty days. But unfortunately, the stock is still down by 14% over a quarter. But shareholders may not all be feeling jubilant, since the share price is still down 20% 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). 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.

See our latest analysis for Bliss GVS Pharma

How Does Bliss GVS Pharma's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 11.77 that sentiment around Bliss GVS Pharma isn't particularly high. The image below shows that Bliss GVS Pharma has a lower P/E than the average (15.8) P/E for companies in the pharmaceuticals industry.

NSEI:BLISSGVS Price Estimation Relative to Market, October 23rd 2019

Its relatively low P/E ratio indicates that Bliss GVS Pharma 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. 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. 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.

In the last year, Bliss GVS Pharma grew EPS like Taylor Swift grew her fan base back in 2010; the 154% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 24% is also impressive. So I'd be surprised if the P/E ratio was not above average.

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. In other words, it does not consider any debt or cash that the company may have on the balance sheet. 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).

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.

Bliss GVS Pharma's Balance Sheet

Since Bliss GVS Pharma holds net cash of ₹98m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Bliss GVS Pharma's P/E Ratio

Bliss GVS Pharma has a P/E of 11.8. That's below the average in the IN market, which is 13.0. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. The below average P/E ratio suggests that market participants don't believe the strong growth will continue. What is very clear is that the market has become more optimistic about Bliss GVS Pharma over the last month, with the P/E ratio rising from 9.0 back then to 11.8 today. 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. 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. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Bliss GVS Pharma. 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.