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This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Blue Dart Express Limited (NSE:BLUEDART) is currently trading at a trailing P/E of 49.6, which is higher than the industry average of 15.4. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Blue Dart Express
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 BLUEDART
Price-Earnings Ratio = Price per share ÷ Earnings per share
BLUEDART Price-Earnings Ratio = ₹3022.15 ÷ ₹60.987 = 49.6x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BLUEDART, 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 49.6, BLUEDART’s P/E is higher than its industry peers (15.4). This implies that investors are overvaluing each dollar of BLUEDART’s earnings. This multiple is a median of profitable companies of 23 Logistics companies in IN including N. R. International, Total Transport Systems and Jet Freight Logistics. You could think of it like this: the market is pricing BLUEDART as if it is a stronger company than the average of its industry group.
A few caveats
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to BLUEDART. If not, the difference in P/E might be a result of other factors. For example, Blue Dart Express Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to BLUEDART may not be 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.