Is Gabriel India Limited (BOM:505714) A Buy At Its Current PE Ratio?

By
Simply Wall St
Published
June 13, 2018
BSE:505714

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Gabriel India Limited (BOM:505714).

Gabriel India Limited (BOM:505714) trades with a trailing P/E of 23.6x, which is lower than the industry average of 24.9x. While 505714 might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Gabriel India

Demystifying the P/E ratio

BSE:505714 PE PEG Gauge June 13th 18
BSE:505714 PE PEG Gauge June 13th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for 505714

Price per share = ₹154.9

Earnings per share = ₹6.56

∴ Price-Earnings Ratio = ₹154.9 ÷ ₹6.56 = 23.6x

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 505714, 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 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.

Since 505714's P/E of 23.6x is lower than its industry peers (24.9x), it means that investors are paying less than they should for each dollar of 505714's earnings. Therefore, according to this analysis, 505714 is an under-priced stock.

Assumptions to watch out for

While our conclusion might prompt you to buy 505714 immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to 505714. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with 505714, then investors would naturally value 505714 at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with 505714, investors would also value 505714 at a lower price since it is a lower growth investment. Both scenarios would explain why 505714 has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 505714 to are fairly valued by the market. If this assumption does not hold true, 505714’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.

BSE:505714 Future Profit June 13th 18
BSE:505714 Future Profit June 13th 18

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 505714 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:

  1. Future Outlook: What are well-informed industry analysts predicting for 505714’s future growth? Take a look at our free research report of analyst consensus for 505714’s outlook.
  2. Past Track Record: Has 505714 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 505714's historicals for more clarity.
  3. 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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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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