Does Akzo Nobel India Limited’s (NSE:AKZOINDIA) PE Ratio Signal A Selling Opportunity?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Akzo Nobel India Limited (NSE:AKZOINDIA).
Akzo Nobel India Limited (NSE:AKZOINDIA) is currently trading at a trailing P/E of 42.5x, which is higher than the industry average of 19.2x. While this makes AKZOINDIA 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. View out our latest analysis for Akzo Nobel India
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in 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.
P/E Calculation for AKZOINDIA
Price-Earnings Ratio = Price per share ÷ Earnings per share
AKZOINDIA Price-Earnings Ratio = ₹1870.3 ÷ ₹43.987 = 42.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AKZOINDIA, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 42.5x, AKZOINDIA’s P/E is higher than its industry peers (19.2x). This implies that investors are overvaluing each dollar of AKZOINDIA’s earnings. Therefore, according to this analysis, AKZOINDIA is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that AKZOINDIA should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to AKZOINDIA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with AKZOINDIA, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing AKZOINDIA to are fairly valued by the market. If this does not hold, there is a possibility that AKZOINDIA’s P/E is lower because our peer group is 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 overvaluation could signal a potential selling opportunity to reduce your exposure to AKZOINDIA. 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:
Future Outlook: What are well-informed industry analysts predicting for AKZOINDIA’s future growth? Take a look at our free research report of analyst consensus for AKZOINDIA’s outlook.
Past Track Record: Has AKZOINDIA 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 AKZOINDIA’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
