How Does Datamatics Global Services's (NSE:DATAMATICS) P/E Compare To Its Industry, After Its Big Share Price Gain?

Datamatics Global Services (NSE:DATAMATICS) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month alone, although it is still down 9.2% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 29% 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. 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 implies that investors have high expectations of what a company can achieve compared to a company with a low P/E ratio.

See our latest analysis for Datamatics Global Services

Does Datamatics Global Services Have A Relatively High Or Low P/E For Its Industry?

Datamatics Global Services's P/E of 6.68 indicates relatively low sentiment towards the stock. The image below shows that Datamatics Global Services has a lower P/E than the average (12.2) P/E for companies in the it industry.

Datamatics Global Services's P/E tells us that market participants think it will not fare as well as its peers in the same industry. 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

P/E ratios primarily reflect market expectations around earnings growth rates. 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.

Most would be impressed by Datamatics Global Services earnings growth of 15% in the last year. And its annual EPS growth rate over 5 years is 7.7%. With that performance, you might expect an above average P/E ratio.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

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. 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 spending might be good or bad, overall, but the key point here is that you need to look at debt to understand the P/E ratio in context.

So What Does Datamatics Global Services's Balance Sheet Tell Us?

Datamatics Global Services has net cash of ₹792m. This is fairly high at 16% 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 Verdict On Datamatics Global Services's P/E Ratio

Datamatics Global Services has a P/E of 6.7. That's below the average in the IN market, which is 13.9. It grew its EPS nicely over the last year, and the healthy balance sheet implies there is more potential for growth. One might conclude that the market is a bit pessimistic, given the low P/E ratio. What we know for sure is that investors are becoming less uncomfortable about Datamatics Global Services's prospects, since they have pushed its P/E ratio from 5.1 to 6.7 over the last month. For those who like to invest in turnarounds, that might mean it's time to put the stock on a watchlist, or research it. But others might consider the opportunity to have passed.

Investors should be looking to buy stocks that the market is wrong about. 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 visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Datamatics Global Services. 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.