The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Kuantum Papers Limited (BOM:532937)’s fundamentals and stock market performance.
Kuantum Papers Limited (BOM:532937) is currently trading at a trailing P/E of 7.6x, which is lower than the industry average of 19.1x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Kuantum Papers
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 532937
Price per share = ₹638.4
Earnings per share = ₹83.53
∴ Price-Earnings Ratio = ₹638.4 ÷ ₹83.53 = 7.6x
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 532937, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
At 7.6x, 532937’s P/E is lower than its industry peers (19.1x). This implies that investors are undervaluing each dollar of 532937’s earnings. Therefore, according to this analysis, 532937 is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy 532937, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to 532937. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with 532937, then investors would naturally value 532937 at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with 532937, investors would also value 532937 at a lower price since it is a lower growth investment. Both scenarios would explain why 532937 has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 532937 to are fairly valued by the market. If this assumption does not hold true, 532937’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 532937, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:
- Financial Health: Is 532937’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 532937 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 532937’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.