Should You Be Tempted To Sell Multi Commodity Exchange of India Limited (NSE:MCX) Because Of Its PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Multi Commodity Exchange of India Limited (NSE:MCX) is currently trading at a trailing P/E of 44.6, which is higher than the industry average of 17.7. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, 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 Multi Commodity Exchange of India
Breaking down 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. 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 MCX
Price-Earnings Ratio = Price per share ÷ Earnings per share
MCX Price-Earnings Ratio = ₹783.5 ÷ ₹17.573 = 44.6x
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 MCX, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since MCX’s P/E of 44.6 is higher than its industry peers (17.7), it means that investors are paying more for each dollar of MCX’s earnings. This multiple is a median of profitable companies of 25 Capital Markets companies in IN including GFL Financials India, VCK Capital Market Services and Elcid Investments. You could think of it like this: the market is pricing MCX as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to MCX. If not, the difference in P/E might be a result of other factors. For example, Multi Commodity Exchange of India Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to MCX may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 MCX. 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 MCX’s future growth? Take a look at our free research report of analyst consensus for MCX’s outlook.
Past Track Record: Has MCX 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 MCX’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
