The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
8K Miles Software Services Limited (NSE:8KMILES) is currently trading at a trailing P/E of 4x, which is lower than the industry average of 17.7x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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 8K Miles Software Services
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 8KMILES
Price-Earnings Ratio = Price per share ÷ Earnings per share
8KMILES Price-Earnings Ratio = ₹235.95 ÷ ₹59.292 = 4x
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 8KMILES, 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. Since 8KMILES’s P/E of 4 is lower than its industry peers (17.7), it means that investors are paying less for each dollar of 8KMILES’s earnings. This multiple is a median of profitable companies of 23 Software companies in IN including Universal Office Automation, Vedavaag Systems and Cybermate Infotek. You can think of it like this: the market is suggesting that 8KMILES is a weaker business than the average comparable company.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to 8KMILES. 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 8KMILES, 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 8KMILES to are fairly valued by the market. If this is violated, 8KMILES’s P/E may be lower than its peers as they are actually overvalued by investors.