Indiabulls Real Estate Limited (NSEI:IBREALEST) trades with a trailing P/E of 23.6x, which is lower than the industry average of 24.5x. While this makes IBREALEST appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Indiabulls Real Estate
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 IBREALEST
Price-Earnings Ratio = Price per share ÷ Earnings per share
IBREALEST Price-Earnings Ratio = ₹228.1 ÷ ₹9.673 = 23.6x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to IBREALEST, 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. Since IBREALEST’s P/E of 23.6x is lower than its industry peers (24.5x), it means that investors are paying less than they should for each dollar of IBREALEST’s earnings. Therefore, according to this analysis, IBREALEST is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that IBREALEST is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to IBREALEST. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with IBREALEST, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing IBREALEST to are fairly valued by the market. If this does not hold true, IBREALEST’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.