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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 about how to value company based on its current earnings and what are the drawbacks of this method.
Country Condo’s Limited (NSE:COUNCODOS) is currently trading at a trailing P/E of 21.4, which is higher than the industry average of 18.6. 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Country Condo’s
Demystifying 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 COUNCODOS
Price-Earnings Ratio = Price per share ÷ Earnings per share
COUNCODOS Price-Earnings Ratio = ₹2.4 ÷ ₹0.112 = 21.4x
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 COUNCODOS, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since COUNCODOS’s P/E of 21.4 is higher than its industry peers (18.6), it means that investors are paying more for each dollar of COUNCODOS’s earnings. This multiple is a median of profitable companies of 25 Real Estate companies in IN including Bronze Infra-Tech, Antariksh Industries and Indiabulls Real Estate. You could also say that the market is suggesting that COUNCODOS is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to COUNCODOS. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Country Condo’s Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to COUNCODOS 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.