Is PSP Projects Limited (NSE:PSPPROJECT) A Sell At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between PSP Projects Limited (NSE:PSPPROJECT)’s fundamentals and stock market performance.
PSP Projects Limited (NSE:PSPPROJECT) is trading with a trailing P/E of 26.1x, which is higher than the industry average of 19.3x. While this makes PSPPROJECT 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. Today, 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 PSP Projects
Breaking down the Price-Earnings 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 PSPPROJECT
Price-Earnings Ratio = Price per share ÷ Earnings per share
PSPPROJECT Price-Earnings Ratio = ₹490.75 ÷ ₹18.78 = 26.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PSPPROJECT, 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. At 26.1x, PSPPROJECT’s P/E is higher than its industry peers (19.3x). This implies that investors are overvaluing each dollar of PSPPROJECT’s earnings. Therefore, according to this analysis, PSPPROJECT is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your PSPPROJECT shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PSPPROJECT. 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 PSPPROJECT, 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 PSPPROJECT to are fairly valued by the market. If this does not hold, there is a possibility that PSPPROJECT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in PSPPROJECT. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 PSPPROJECT’s future growth? Take a look at our free research report of analyst consensus for PSPPROJECT’s outlook.
Financial Health: Is PSPPROJECT’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.
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.
