In This Article:
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
CL Educate Limited (NSE:CLEDUCATE) is currently trading at a trailing P/E of 32.7, which is higher than the industry average of 21.6. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for CL Educate
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 CLEDUCATE
Price-Earnings Ratio = Price per share ÷ Earnings per share
CLEDUCATE Price-Earnings Ratio = ₹128 ÷ ₹3.909 = 32.7x
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 CLEDUCATE, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. CLEDUCATE’s P/E of 32.7 is higher than its industry peers (21.6), which implies that each dollar of CLEDUCATE’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 18 Consumer Services companies in IN including Global Education, Career Point and Career Point. You could think of it like this: the market is pricing CLEDUCATE as if it is a stronger company than the average of its industry group.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to CLEDUCATE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if CL Educate Limited is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to CLEDUCATE may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 rebalance your portfolio and reduce your holdings in CLEDUCATE. 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 highly recommend you to complete your research by taking a look at the following: