This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Tanla Solutions Limited (NSE:TANLA)’s fundamentals and stock market performance.

Tanla Solutions Limited (NSE:TANLA) is currently trading at a trailing P/E of 17.2x, which is lower than the industry average of 20.3x. 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Tanla Solutions

Breaking down 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 TANLA

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

TANLA Price-Earnings Ratio = ₹29.3 ÷ ₹1.7 = 17.2x

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 TANLA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since TANLA’s P/E of 17.2x is lower than its industry peers (20.3x), it means that investors are paying less than they should for each dollar of TANLA’s earnings. Therefore, according to this analysis, TANLA is an under-priced stock.

A few caveats

However, before you rush out to buy TANLA, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to TANLA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with TANLA, 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 TANLA to are fairly valued by the market. If this does not hold, there is a possibility that TANLA’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

Since you may have already conducted your due diligence on TANLA, 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 highly recommend you to complete your research by taking a look at the following:

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

2. Past Track Record: Has TANLA 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 TANLA’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.