This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Mini Diamonds (India) Limited (BOM:523373)’s fundamentals and stock market performance.
Mini Diamonds (India) Limited (BOM:523373) is trading with a trailing P/E of 11.3x, which is lower than the industry average of 16.9x. While this makes 523373 appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Mini Diamonds (India)
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 523373
Price per share = ₹9.95
Earnings per share = ₹0.880
∴ Price-Earnings Ratio = ₹9.95 ÷ ₹0.880 = 11.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against 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 523373, 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 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 523373’s P/E of 11.3x is lower than its industry peers (16.9x), it means that investors are paying less than they should for each dollar of 523373’s earnings. As such, our analysis shows that 523373 represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy 523373, 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 523373. 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 523373, then investors would naturally value 523373 at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with 523373, investors would also value 523373 at a lower price since it is a lower growth investment. Both scenarios would explain why 523373 has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing 523373 to are fairly valued by the market. If this assumption does not hold true, 523373’s lower P/E ratio may be because firms in our peer group are being overvalued 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 add more of 523373 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:
- Financial Health: Is 523373’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 523373 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 523373’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.