In This Article:
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 begin learning the link between Aries Agro Limited (NSE:ARIES)’s fundamentals and stock market performance.
Aries Agro Limited (NSE:ARIES) trades with a trailing P/E of 17.4x, which is lower than the industry average of 19.2x. While ARIES might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Aries Agro
Demystifying 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 ARIES
Price-Earnings Ratio = Price per share ÷ Earnings per share
ARIES Price-Earnings Ratio = ₹140.4 ÷ ₹8.06 = 17.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ARIES, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. ARIES’s P/E of 17.4x is lower than its industry peers (19.2x), which implies that each dollar of ARIES’s earnings is being undervalued by investors. As such, our analysis shows that ARIES represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ARIES is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to ARIES, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ARIES, 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 ARIES to are fairly valued by the market. If this does not hold true, ARIES’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on ARIES, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following: