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It's really great to see that even after a strong run, JBM Auto (NSE:JBMA) shares have been powering on, with a gain of 31% in the last thirty days. But shareholders may not all be feeling jubilant, since the share price is still down 25% in the last year.
All else being equal, a sharp share price increase should make a stock less attractive to potential investors. 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.
Check out our latest analysis for JBM Auto
Does JBM Auto Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 12.40 that sentiment around JBM Auto isn't particularly high. The image below shows that JBM Auto has a lower P/E than the average (14.6) P/E for companies in the auto components industry.
This suggests that market participants think JBM Auto will underperform other companies in its industry. Many investors like to buy stocks when the market is pessimistic about their prospects. It is arguably worth checking if insiders are buying shares, because that might imply they believe the stock is undervalued.
How Growth Rates Impact P/E Ratios
Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. 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.
JBM Auto shrunk earnings per share by 5.9% last year. But it has grown its earnings per share by 11% per year over the last three years.
Remember: P/E Ratios Don't Consider The Balance Sheet
Don't forget that the P/E ratio considers market capitalization. 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.
JBM Auto's Balance Sheet
Net debt is 48% of JBM Auto's market cap. While that's enough to warrant consideration, it doesn't really concern us.