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Omax Autos (NSE:OMAXAUTO) shares have continued recent momentum with a 32% gain in the last month alone. But shareholders may not all be feeling jubilant, since the share price is still down 38% in the last year.
Assuming no other changes, a sharply higher share price makes a stock less 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for Omax Autos
Does Omax Autos Have A Relatively High Or Low P/E For Its Industry?
Omax Autos's P/E of 3.78 indicates relatively low sentiment towards the stock. If you look at the image below, you can see Omax Autos has a lower P/E than the average (14.4) in the auto components industry classification.
Its relatively low P/E ratio indicates that Omax Autos shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the 'E' increases, over time. That means unless the share price increases, the P/E will reduce in a few years. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.
Omax Autos's earnings per share fell by 2.2% in the last twelve months. But it has grown its earnings per share by 54% per year over the last three years.
Don't Forget: The P/E Does Not Account For Debt or Bank Deposits
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.
Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.
Omax Autos's Balance Sheet
Omax Autos has net debt worth a very significant 162% of its market capitalization. If you want to compare its P/E ratio to other companies, you must keep in mind that these debt levels would usually warrant a relatively low P/E.