How Does Astron Paper & Board Mill's (NSE:ASTRON) P/E Compare To Its Industry, After Its Big Share Price Gain?

Astron Paper & Board Mill (NSE:ASTRON) shares have had a really impressive month, gaining 32%, after some slippage. But that gain wasn't enough to make shareholders whole, as the share price is still down 5.1% 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. One way to gauge market expectations of a stock 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 Astron Paper & Board Mill

How Does Astron Paper & Board Mill's P/E Ratio Compare To Its Peers?

We can tell from its P/E ratio of 18.54 that there is some investor optimism about Astron Paper & Board Mill. As you can see below, Astron Paper & Board Mill has a higher P/E than the average company (9.2) in the forestry industry.

That means that the market expects Astron Paper & Board Mill will outperform other companies in its industry. Clearly the market expects growth, but it isn't guaranteed. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.

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. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Astron Paper & Board Mill's earnings per share grew by -7.7% in the last twelve months. And earnings per share have improved by 49% annually, over the last three years.

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

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. So it won't reflect the advantage of cash, or disadvantage of debt. 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 Astron Paper & Board Mill's Balance Sheet Tell Us?

Astron Paper & Board Mill's net debt is 13% of its market cap. This could bring some additional risk, and reduce the number of investment options for management; worth remembering if you compare its P/E to businesses without debt.

The Verdict On Astron Paper & Board Mill's P/E Ratio

Astron Paper & Board Mill's P/E is 18.5 which is above average (13.9) in its market. Given the debt is only modest, and earnings are already moving in the right direction, it's not surprising that the market expects continued improvement. What we know for sure is that investors have become more excited about Astron Paper & Board Mill recently, since they have pushed its P/E ratio from 14.1 to 18.5 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. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. We don't have analyst forecasts, but you could get a better understanding of its growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

But note: Astron Paper & Board Mill may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.