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 BNR Udyog Limited (BOM:530809)’s fundamentals and stock market performance.
BNR Udyog Limited (BOM:530809) is currently trading at a trailing P/E of 105.4x, which is higher than the industry average of 19.4x. While 530809 might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for BNR Udyog
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see 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 530809
Price per share = ₹27.4
Earnings per share = ₹0.260
∴ Price-Earnings Ratio = ₹27.4 ÷ ₹0.260 = 105.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to 530809, 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.
530809’s P/E of 105.4x is higher than its industry peers (19.4x), which implies that each dollar of 530809’s earnings is being overvalued by investors. As such, our analysis shows that 530809 represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that 530809 should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to 530809. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared lower growth firms with 530809, then 530809’s P/E would naturally be higher since investors would reward 530809’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with 530809, 530809’s P/E would again be higher since investors would reward 530809’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing 530809 to are fairly valued by the market. If this does not hold, there is a possibility that 530809’s P/E is higher because firms in our peer group are being undervalued 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 rebalance your portfolio and reduce your holdings in 530809. 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:
- Financial Health: Is 530809’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has 530809 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 530809’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.