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 Bata India Limited (BOM:500043)’s fundamentals and stock market performance.
Bata India Limited (BOM:500043) is trading with a trailing P/E of 44.8x, which is higher than the industry average of 17.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, 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 Bata India
What you need to know about 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 500043
Price per share = ₹768.7
Earnings per share = ₹17.16
∴ Price-Earnings Ratio = ₹768.7 ÷ ₹17.16 = 44.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to 500043, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use below. 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 44.8x, 500043’s P/E is higher than its industry peers (17.2x). This implies that investors are overvaluing each dollar of 500043’s earnings. As such, our analysis shows that 500043 represents an over-priced stock.
A few caveats
However, before you rush out to sell your 500043 shares, 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 500043. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with 500043, then investors would naturally value 500043 at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with 500043, investors would also value 500043 at a higher price since it is a higher growth investment. Both scenarios would explain why 500043 has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 500043 to are fairly valued by the market. If this does not hold, there is a possibility that 500043’s P/E is higher because firms in our peer group are being undervalued by the market.
What this means for you:
Since you may have already conducted your due diligence on 500043, the overvaluation of the stock may mean it is a good time to reduce 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for 500043’s future growth? Take a look at our free research report of analyst consensus for 500043’s outlook.
- Past Track Record: Has 500043 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 500043'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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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.
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