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Unfortunately for some shareholders, the Vikas EcoTech (NSE:VIKASECO) share price has dived 32% in the last thirty days. And that drop will have no doubt have some shareholders concerned that the 78% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
Assuming nothing else has changed, a lower share price makes a stock more 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, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. 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). 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 Vikas EcoTech
How Does Vikas EcoTech's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 6.58 that sentiment around Vikas EcoTech isn't particularly high. The image below shows that Vikas EcoTech has a lower P/E than the average (10.7) P/E for companies in the chemicals industry.
Its relatively low P/E ratio indicates that Vikas EcoTech shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Vikas EcoTech, it's quite possible it could surprise on the upside. 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
When earnings fall, the 'E' decreases, over time. That means unless the share price falls, the P/E will increase in a few years. A higher P/E should indicate the stock is expensive relative to others -- and that may encourage shareholders to sell.
Vikas EcoTech's earnings per share fell by 54% in the last twelve months. But over the longer term (5 years) earnings per share have increased by 22%. And EPS is down 32% a year, over the last 3 years. This might lead to low expectations.
A Limitation: P/E Ratios Ignore Debt and Cash In The Bank
Don't forget that the P/E ratio considers market capitalization. That means it doesn't take debt or cash into account. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.