Marvel Decor (NSE:MDL) shares have had a really impressive month, gaining 41%, after some slippage. Longer term shareholders are no doubt thankful for the recovery in the share price, since it's pretty much flat for the year, even after the recent pop.
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. 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 Marvel Decor
Does Marvel Decor Have A Relatively High Or Low P/E For Its Industry?
Marvel Decor's P/E of 11.65 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Marvel Decor has a lower P/E than the average (22.0) in the consumer durables industry classification.
Its relatively low P/E ratio indicates that Marvel Decor shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Marvel Decor, 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. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Most would be impressed by Marvel Decor earnings growth of 13% in the last year. And its annual EPS growth rate over 5 years is 11%. So one might expect an above average P/E ratio.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.