PVR Limited (NSEI:PVR) is currently trading at a trailing P/E of 58.3x, which is higher than the industry average of 26.1x. While this makes PVR 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for PVR
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 PVR
Price-Earnings Ratio = Price per share ÷ Earnings per share
PVR Price-Earnings Ratio = ₹1232.05 ÷ ₹21.131 = 58.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PVR, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 58.3x, PVR’s P/E is higher than its industry peers (26.1x). This implies that investors are overvaluing each dollar of PVR’s earnings. As such, our analysis shows that PVR represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your PVR shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to PVR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PVR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PVR to are fairly valued by the market. If this does not hold, there is a possibility that PVR’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.