Does Hindalco Industries Limited’s (NSE:HINDALCO) PE Ratio Signal A Selling Opportunity?
Hindalco Industries Limited (NSEI:HINDALCO) is currently trading at a trailing P/E of 24.6x, which is higher than the industry average of 19.7x. While HINDALCO might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Hindalco Industries
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 HINDALCO
Price-Earnings Ratio = Price per share ÷ Earnings per share
HINDALCO Price-Earnings Ratio = ₹226.35 ÷ ₹9.218 = 24.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to HINDALCO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. HINDALCO’s P/E of 24.6x is higher than its industry peers (19.7x), which implies that each dollar of HINDALCO’s earnings is being overvalued by investors. Therefore, according to this analysis, HINDALCO is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your HINDALCO shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to HINDALCO, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with HINDALCO, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing HINDALCO to are fairly valued by the market. If this does not hold, there is a possibility that HINDALCO’s P/E is lower because our peer group is overvalued by the market.
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.
