To the annoyance of some shareholders, Kirloskar Ferrous Industries (NSE:KIRLFER) shares are down a considerable in the last month. Zooming out, the recent drop wiped out a year's worth of gains, with the share price now back where it was a year ago.
Assuming no other changes, a sharply higher share price makes a stock less attractive to potential buyers. 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). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
View our latest analysis for Kirloskar Ferrous Industries
How Does Kirloskar Ferrous Industries's P/E Ratio Compare To Its Peers?
Kirloskar Ferrous Industries's P/E is 9.13. The image below shows that Kirloskar Ferrous Industries has a P/E ratio that is roughly in line with the metals and mining industry average (8.5).
Its P/E ratio suggests that Kirloskar Ferrous Industries shareholders think that in the future it will perform about the same as other companies in its industry classification. The company could surprise by performing better than average, in the future. I would further inform my view by checking insider buying and selling., among other things.
How Growth Rates Impact P/E Ratios
P/E ratios primarily reflect market expectations around earnings growth rates. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.
It's nice to see that Kirloskar Ferrous Industries grew EPS by a stonking 45% in the last year. And its annual EPS growth rate over 5 years is 11%. So we'd generally expect it to have a relatively 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.