Bharatiya Global Infomedia Limited (NSEI:BGLOBAL) trades with a trailing P/E of 127.5x, which is higher than the industry average of 19.6x. While this makes BGLOBAL 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. See our latest analysis for Bharatiya Global Infomedia
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for BGLOBAL
Price per share = ₹5.66
Earnings per share = ₹0.044
∴ Price-Earnings Ratio = ₹5.66 ÷ ₹0.044 = 127.5x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 BGLOBAL, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will 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.
Since BGLOBAL’s P/E of 127.5x is higher than its industry peers (19.6x), it means that investors are paying more than they should for each dollar of BGLOBAL’s earnings. As such, our analysis shows that BGLOBAL represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your BGLOBAL 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 BGLOBAL. 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 BGLOBAL, then BGLOBAL’s P/E would naturally be higher since investors would reward BGLOBAL’s higher growth with a higher price. Alternatively, if you inadvertently compared riskier firms with BGLOBAL, BGLOBAL’s P/E would again be higher since investors would reward BGLOBAL’s lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing BGLOBAL to are fairly valued by the market. If this assumption does not hold true, BGLOBAL’s higher P/E ratio may be 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 BGLOBAL. 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 urge you to complete your research by taking a look at the following:
- 1. Financial Health: Is BGLOBAL’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.
- 2. Past Track Record: Has BGLOBAL 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 BGLOBAL’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.