Delta Corp Limited (NSEI:DELTACORP) trades with a trailing P/E of 76.3x, which is higher than the industry average of 46.2x. While DELTACORP might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Delta
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 DELTACORP
Price-Earnings Ratio = Price per share ÷ Earnings per share
DELTACORP Price-Earnings Ratio = ₹365.8 ÷ ₹4.794 = 76.3x
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 DELTACORP, 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 DELTACORP’s P/E of 76.3x is higher than its industry peers (46.2x), it means that investors are paying more than they should for each dollar of DELTACORP’s earnings. Therefore, according to this analysis, DELTACORP is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your DELTACORP shares, 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 DELTACORP, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with DELTACORP, 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 DELTACORP to are fairly valued by the market. If this does not hold true, DELTACORP’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.