I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in ExlService Holdings Inc (NASDAQ:EXLS).
ExlService Holdings Inc (NASDAQ:EXLS) is trading with a trailing P/E of 36.7x, which is higher than the industry average of 24.6x. While this makes EXLS 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 ExlService Holdings
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for EXLS
Price-Earnings Ratio = Price per share ÷ Earnings per share
EXLS Price-Earnings Ratio = $59.57 ÷ $1.623 = 36.7x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as EXLS, 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. At 36.7x, EXLS’s P/E is higher than its industry peers (24.6x). This implies that investors are overvaluing each dollar of EXLS’s earnings. Therefore, according to this analysis, EXLS is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that EXLS 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 EXLS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with EXLS, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing EXLS to are fairly valued by the market. If this does not hold true, EXLS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on EXLS, 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for EXLS’s future growth? Take a look at our free research report of analyst consensus for EXLS’s outlook.
- Past Track Record: Has EXLS 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 EXLS’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.