Is It Time To Buy Zee Entertainment Enterprises Limited (NSE:ZEEL) Based Off Its PE Ratio?
Zee Entertainment Enterprises Limited (NSEI:ZEEL) is currently trading at a trailing P/E of 20.9x, which is lower than the industry average of 30.7x. While this makes ZEEL appear like a great stock to buy, 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. See our latest analysis for Zee Entertainment Enterprises
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 ZEEL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZEEL Price-Earnings Ratio = ₹584.5 ÷ ₹27.917 = 20.9x
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 ZEEL, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. ZEEL’s P/E of 20.9x is lower than its industry peers (30.7x), which implies that each dollar of ZEEL’s earnings is being undervalued by investors. Therefore, according to this analysis, ZEEL is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy ZEEL immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ZEEL. 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 ZEEL, 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 ZEEL to are fairly valued by the market. If this does not hold, there is a possibility that ZEEL’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.
