In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Apcotex Industries Limited (NSE:APCOTEXIND) is currently trading at a trailing P/E of 25.5, which is higher than the industry average of 16.6. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
Check out our latest analysis for Apcotex Industries
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 APCOTEXIND
Price-Earnings Ratio = Price per share ÷ Earnings per share
APCOTEXIND Price-Earnings Ratio = ₹549 ÷ ₹21.536 = 25.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 APCOTEXIND, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 25.5, APCOTEXIND’s P/E is higher than its industry peers (16.6). This implies that investors are overvaluing each dollar of APCOTEXIND’s earnings. This multiple is a median of profitable companies of 25 Chemicals companies in IN including Mysore Petro Chemicals, Hindcon Chemicals and Vikas Proppant & Granite. You could think of it like this: the market is pricing APCOTEXIND as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to APCOTEXIND. If not, the difference in P/E might be a result of other factors. For example, if Apcotex Industries Limited is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with APCOTEXIND are not 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.