A Rising Share Price Has Us Looking Closely At Arihant Superstructures Ltd.'s (NSE:ASL) P/E Ratio

Arihant Superstructures (NSE:ASL) shareholders are no doubt pleased to see that the share price has bounced 39% in the last month alone, although it is still down 27% over the last quarter. But shareholders may not all be feeling jubilant, since the share price is still down 40% 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. 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 Arihant Superstructures

How Does Arihant Superstructures's P/E Ratio Compare To Its Peers?

Arihant Superstructures has a P/E ratio of 16.49. As you can see below Arihant Superstructures has a P/E ratio that is fairly close for the average for the real estate industry, which is 16.5.

Arihant Superstructures's P/E tells us that market participants think its prospects are roughly in line with its industry. So if Arihant Superstructures actually outperforms its peers going forward, that should be a positive for the share price. Further research into factors such as insider buying and selling, could help you form your own view on whether that is likely.

How Growth Rates Impact P/E Ratios

If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.

Arihant Superstructures's earnings per share fell by 21% in the last twelve months. But EPS is up 20% over the last 5 years. And EPS is down 24% a year, over the last 3 years. This growth rate might warrant a low P/E ratio.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. 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).

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.

How Does Arihant Superstructures's Debt Impact Its P/E Ratio?

Arihant Superstructures has net debt worth a very significant 218% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.

The Verdict On Arihant Superstructures's P/E Ratio

Arihant Superstructures trades on a P/E ratio of 16.5, which is above its market average of 13.9. With relatively high debt, and no earnings per share growth over twelve months, it's safe to say the market believes the company will improve its earnings growth in the future. What we know for sure is that investors have become more excited about Arihant Superstructures recently, since they have pushed its P/E ratio from 11.8 to 16.5 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.

When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. We don't have analyst forecasts, but shareholders might want to examine this detailed historical graph of earnings, revenue and cash flow.

But note: Arihant Superstructures 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.