Is Surana Solar Limited (NSE:SURANASOL) A Sell At Its Current PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Surana Solar Limited (NSE:SURANASOL)’s fundamentals and stock market performance.

Surana Solar Limited (NSE:SURANASOL) trades with a trailing P/E of 47.4x, which is higher than the industry average of 45.4x. While this makes SURANASOL appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Surana Solar

What you need to know about the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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.

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SURANASOL, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 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 47.4x, SURANASOL’s P/E is higher than its industry peers (45.4x). This implies that investors are overvaluing each dollar of SURANASOL’s earnings. This multiple is a median of profitable companies of 5 Semiconductor companies in IN including Solex Energy, Ruttonsha International Rectifier and Websol Energy System. As such, our analysis shows that SURANASOL represents an over-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that SURANASOL should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to SURANASOL. 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 SURANASOL, then investors would naturally value SURANASOL at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with SURANASOL, investors would also value SURANASOL at a higher price since it is a higher growth investment. Both scenarios would explain why SURANASOL has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing SURANASOL to are fairly valued by the market. If this assumption does not hold true, SURANASOL’s higher P/E ratio may be 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 SURANASOL, 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 urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for SURANASOL’s future growth? Take a look at our free research report of analyst consensus for SURANASOL’s outlook.
2. Past Track Record: Has SURANASOL 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 SURANASOL'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 analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.