In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Banco Products (India) Limited (NSE:BANCOINDIA)’s fundamentals and stock market performance.
Banco Products (India) Limited (NSE:BANCOINDIA) trades with a trailing P/E of 15.5x, which is lower than the industry average of 24.2x. 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. See our latest analysis for Banco Products (India)
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BANCOINDIA
Price-Earnings Ratio = Price per share ÷ Earnings per share
BANCOINDIA Price-Earnings Ratio = ₹213.6 ÷ ₹13.781 = 15.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BANCOINDIA, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since BANCOINDIA’s P/E of 15.5x is lower than its industry peers (24.2x), it means that investors are paying less than they should for each dollar of BANCOINDIA’s earnings. As such, our analysis shows that BANCOINDIA represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy BANCOINDIA, 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 BANCOINDIA, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BANCOINDIA, 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 BANCOINDIA to are fairly valued by the market. If this does not hold true, BANCOINDIA’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 BANCOINDIA, 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: