Should You Be Tempted To Sell Page Industries Limited (NSE:PAGEIND) Because Of Its PE Ratio?
Page Industries Limited (NSEI:PAGEIND) is trading with a trailing P/E of 78x, which is higher than the industry average of 18.6x. While this makes PAGEIND 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Page Industries
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. 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 PAGEIND
Price-Earnings Ratio = Price per share ÷ Earnings per share
PAGEIND Price-Earnings Ratio = ₹22335.75 ÷ ₹286.475 = 78x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as PAGEIND, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since PAGEIND’s P/E of 78x is higher than its industry peers (18.6x), it means that investors are paying more than they should for each dollar of PAGEIND’s earnings. As such, our analysis shows that PAGEIND represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your PAGEIND shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to PAGEIND. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PAGEIND, 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 PAGEIND to are fairly valued by the market. If this does not hold true, PAGEIND’s lower P/E ratio may be because firms in our peer group are 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.
