Quintegra Solutions Limited (NSEI:QUINTEGRA) is trading with a trailing P/E of 0.8x, which is lower than the industry average of 18.5x. While this makes QUINTEGRA 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Quintegra Solutions
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 QUINTEGRA
Price per share = ₹0.91
Earnings per share = ₹1.2
∴ Price-Earnings Ratio = ₹0.91 ÷ ₹1.2 = 0.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as QUINTEGRA, 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.
QUINTEGRA’s P/E of 0.8x is lower than its industry peers (18.5x), which implies that each dollar of QUINTEGRA’s earnings is being undervalued by investors. As such, our analysis shows that QUINTEGRA represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy QUINTEGRA, 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 QUINTEGRA. 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 QUINTEGRA, then investors would naturally value QUINTEGRA at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with QUINTEGRA, investors would also value QUINTEGRA at a lower price since it is a lower growth investment. Both scenarios would explain why QUINTEGRA has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing QUINTEGRA to are fairly valued by the market. If this assumption does not hold true, QUINTEGRA’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to QUINTEGRA. 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is QUINTEGRA’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 QUINTEGRA 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 QUINTEGRA’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.