Is It Time To Sell National Steel and Agro Industries Limited (NSE:NATNLSTEEL) Based Off Its PE Ratio?

NATNLSTEEL is priced at a depressed multiple of 3.44x based on its prior year’s earnings, which is around 433.3058432017098 of the Metals and Mining’s average of 14.92x. But should the inexpensive multiple be the final verdict of NATNLSTEEL’s undervaluation? No. This is because multiples like PE tend to overlook key company-specific factors such as future growth and capital structure. Below, I will lay out some important considerations to help determine which multiple best suits NATNLSTEEL’s growing business. Let’s dive in.

How much does NATNLSTEEL earn?

PE is only used when a company is profitable, such as NATNLSTEEL. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. Companies like this are often valued based off other relevant factors, using multiples like P/S (price-to-sales) or P/FCF (price-to-free-cash-flow) depending on the business characteristics. In the past, NATNLSTEEL has always maintained its profitability. As earnings forecasts indicate the positive trend will continue, the PE multiple can be an acceptable tool to assess the NATNLSTEEL’s value, but let’s see if there is a better alternative.

NSEI:NATNLSTEEL Future Profit June 26th 18
NSEI:NATNLSTEEL Future Profit June 26th 18

Does NATNLSTEEL owe a lot of money?

Generally, debt should be below 40% of equity. Given that ’s debt-to-equity ratio is currently 68.09%, there’s room for improvement. This ratio indicates that for every ₹1 you invest, the company owes ₹0.68 to debtors. This can be risky, given that in the event of bankruptcy, these debtors receive the first claim on the assets of the company.

NSEI:NATNLSTEEL Historical Debt June 26th 18
NSEI:NATNLSTEEL Historical Debt June 26th 18
Debt levels matter when valuing the business because in theory NATNLSTEEL’s share price represents the equity portion only, but its important to account for debt, as debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation.

NATNLSTEEL’s EV/EBITDA = ₹2.24b / ₹0 = 1.36x

The 1.36x average multiple for the industry indicates that NATNLSTEEL may be priced at a discount, and to a greater extent than what was indicated by the PE ratio.

Will NATNLSTEEL experience high growth?

With an expected annual growth rate of 32.56% each year for the next five years, I’d say NATNLSTEEL has an extremely optimistic growth outlook. However, current earnings don’t reflect any of this potential growth, which is a limitation for using past (or “trailing”) values of EBITDA. You should pay for what you’re going to get, not what’s already happened. Let’s adjust our previous multiple for future expectations by using projected EBITDA for the next year.

NATNLSTEEL’s forward EV/EBITDA = ₹2.24b /₹1.91b = 1.17x

The 6.21x average multiple for the industry suggests that NATNLSTEEL is undervalued relative to its peers. but not as much as indicated by looking at the multiple with a trailing perspective.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. 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 ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
  2. Past Track Record: Has 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 ‘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.