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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 learn about the link between company’s fundamentals and stock market performance.
GeeCee Ventures Limited (NSE:GEECEE) trades with a trailing P/E of 8x, which is lower than the industry average of 19.2x. While this makes GEECEE appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for GeeCee Ventures
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 GEECEE
Price-Earnings Ratio = Price per share ÷ Earnings per share
GEECEE Price-Earnings Ratio = ₹112.95 ÷ ₹14.18 = 8x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GEECEE, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. GEECEE’s P/E of 8 is lower than its industry peers (19.2), which implies that each dollar of GEECEE’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Real Estate companies in IN including Bronze Infra-Tech, Antariksh Industries and Indiabulls Real Estate. One could put it like this: the market is pricing GEECEE as if it is a weaker company than the average company in its industry.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to GEECEE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with GEECEE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing GEECEE to are fairly valued by the market. If this does not hold, there is a possibility that GEECEE’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to GEECEE. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: