Those holding Indiabulls Ventures (NSE:IBVENTUREPP) shares must be pleased that the share price has rebounded 30% in the last thirty days. But unfortunately, the stock is still down by 43% over a quarter. However, that doesn't change the fact that longer term shareholders might have been mercilessly wrecked by the 84% share price decline throughout the 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. 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 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.
Check out our latest analysis for Indiabulls Ventures
How Does Indiabulls Ventures's P/E Ratio Compare To Its Peers?
We can tell from its P/E ratio of 14.71 that there is some investor optimism about Indiabulls Ventures. As you can see below, Indiabulls Ventures has a higher P/E than the average company (12.9) in the capital markets industry.
Its relatively high P/E ratio indicates that Indiabulls Ventures shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So investors should always consider the P/E ratio alongside other factors, such as whether company directors have been buying shares.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. And in that case, the P/E ratio itself will drop rather quickly. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Indiabulls Ventures saw earnings per share improve by -4.4% last year. And earnings per share have improved by 11% annually, over the last five years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. 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).