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RPG Life Sciences (NSE:RPGLIFE) shares have continued recent momentum with a 30% gain in the last month alone. The bad news is that even after that recovery shareholders are still underwater by about 3.3% for the full 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. The implication here is that deep value investors might steer clear when expectations of a company are too high. 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.
View our latest analysis for RPG Life Sciences
Does RPG Life Sciences Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 24.33 that there is some investor optimism about RPG Life Sciences. The image below shows that RPG Life Sciences has a higher P/E than the average (15.8) P/E for companies in the pharmaceuticals industry.
Its relatively high P/E ratio indicates that RPG Life Sciences 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 further research is always essential. I often monitor director buying and selling.
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. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
RPG Life Sciences increased earnings per share by an impressive 17% over the last twelve months. In contrast, EPS has decreased by 3.7%, annually, over 3 years.
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. That means it doesn't take debt or cash into account. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).
Is Debt Impacting RPG Life Sciences's P/E?
Net debt totals just 9.5% of RPG Life Sciences's market cap. It would probably trade on a higher P/E ratio if it had a lot of cash, but I doubt it is having a big impact.