This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Pilani Investment and Industries Corporation Limited (NSE:PILANIINVS)’s fundamentals and stock market performance.
Pilani Investment and Industries Corporation Limited (NSE:PILANIINVS) is currently trading at a trailing P/E of 13.3x, which is lower than the industry average of 20.5x. While this makes PILANIINVS appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Pilani Investment and Industries
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for PILANIINVS
Price per share = ₹2290
Earnings per share = ₹171.94
∴ Price-Earnings Ratio = ₹2290 ÷ ₹171.94 = 13.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PILANIINVS, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
At 13.3x, PILANIINVS’s P/E is lower than its industry peers (20.5x). This implies that investors are undervaluing each dollar of PILANIINVS’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in IN including Elcid Investments, Dalal Street Investments and SIL Investments. As such, our analysis shows that PILANIINVS represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy PILANIINVS, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to PILANIINVS. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing lower risk firms with PILANIINVS, then PILANIINVS’s P/E would naturally be lower than its peers, since investors would value those with lower risk with a higher price. The other possibility is if you were accidentally comparing higher growth firms with PILANIINVS. In this case, PILANIINVS’s P/E would be lower since investors would also reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PILANIINVS to are fairly valued by the market. If this assumption does not hold true, PILANIINVS’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of PILANIINVS to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PILANIINVS’s future growth? Take a look at our free research report of analyst consensus for PILANIINVS’s outlook.
- Past Track Record: Has PILANIINVS been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PILANIINVS’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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