Future Enterprises Limited (NSEI:FELDVR) is trading with a trailing P/E of 51.8x, which is higher than the industry average of 35.2x. While FELDVR 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Future Enterprises
Breaking down the P/E 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 FELDVR
Price per share = ₹38.45
Earnings per share = ₹0.742
∴ Price-Earnings Ratio = ₹38.45 ÷ ₹0.742 = 51.8x
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 FELDVR, 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.
At 51.8x, FELDVR’s P/E is higher than its industry peers (35.2x). This implies that investors are overvaluing each dollar of FELDVR’s earnings. Therefore, according to this analysis, FELDVR is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your FELDVR shares 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 FELDVR. 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 FELDVR, then FELDVR’s P/E would naturally be higher since investors would reward FELDVR’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with FELDVR, FELDVR’s P/E would again be higher since investors would reward FELDVR’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing FELDVR to are fairly valued by the market. If this does not hold, there is a possibility that FELDVR’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to FELDVR. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 FELDVR’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 FELDVR 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 FELDVR’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.