A Rising Share Price Has Us Looking Closely At Balrampur Chini Mills Limited's (NSE:BALRAMCHIN) P/E Ratio

Simply Wall St

Balrampur Chini Mills (NSE:BALRAMCHIN) shareholders are no doubt pleased to see that the share price has had a great month, posting a 32% gain, recovering from prior weakness. That's tops off a massive gain of 103% 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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock 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 Balrampur Chini Mills

How Does Balrampur Chini Mills's P/E Ratio Compare To Its Peers?

Balrampur Chini Mills's P/E of 6.03 indicates relatively low sentiment towards the stock. The image below shows that Balrampur Chini Mills has a lower P/E than the average (14.6) P/E for companies in the food industry.

NSEI:BALRAMCHIN Price Estimation Relative to Market, September 21st 2019

Its relatively low P/E ratio indicates that Balrampur Chini Mills shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Balrampur Chini Mills, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Earnings growth rates have a big influence on P/E ratios. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others -- and that may attract buyers.

In the last year, Balrampur Chini Mills grew EPS like Taylor Swift grew her fan base back in 2010; the 95% gain was both fast and well deserved. The sweetener is that the annual five year growth rate of 138% is also impressive. With that kind of growth rate we would generally expect a high P/E ratio.

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

Don't forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

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.

How Does Balrampur Chini Mills's Debt Impact Its P/E Ratio?

Balrampur Chini Mills's net debt is 51% of its market cap. If you want to compare its P/E ratio to other companies, you should absolutely keep in mind it has significant borrowings.

The Verdict On Balrampur Chini Mills's P/E Ratio

Balrampur Chini Mills trades on a P/E ratio of 6.0, which is below the IN market average of 13.6. The company may have significant debt, but EPS growth was good last year. If the company can continue to grow earnings, then the current P/E may be unjustifiably low. What is very clear is that the market has become less pessimistic about Balrampur Chini Mills over the last month, with the P/E ratio rising from 4.6 back then to 6.0 today. If you like to buy stocks that could be turnaround opportunities, then this one might be a candidate; but if you're more sensitive to price, then you may feel the opportunity has passed.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. 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.

Of course you might be able to find a better stock than Balrampur Chini Mills. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.