I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Sunteck Realty Limited (NSE:SUNTECK).

Sunteck Realty Limited (NSE:SUNTECK) is trading with a trailing P/E of 22.8x, which is lower than the industry average of 24.7x. While SUNTECK 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. In this article, 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 Sunteck Realty

What you need to know about the P/E ratio

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 SUNTECK

Price-Earnings Ratio = Price per share ÷ Earnings per share

SUNTECK Price-Earnings Ratio = ₹382.35 ÷ ₹16.74 = 22.8x

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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SUNTECK, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 22.8x, SUNTECK’s P/E is lower than its industry peers (24.7x). This implies that investors are undervaluing each dollar of SUNTECK’s earnings. Therefore, according to this analysis, SUNTECK is an under-priced stock.

Assumptions to watch out for

While our conclusion might prompt you to buy SUNTECK immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SUNTECK. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with SUNTECK, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SUNTECK to are fairly valued by the market. If this does not hold true, SUNTECK’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of SUNTECK to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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:

1. Future Outlook: What are well-informed industry analysts predicting for SUNTECK’s future growth? Take a look at our free research report of analyst consensus for SUNTECK’s outlook.

2. Past Track Record: Has SUNTECK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SUNTECK’s historicals for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.