In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Man Industries (India) Limited (NSE:MANINDS).
Man Industries (India) Limited (NSE:MANINDS) trades with a trailing P/E of 10.6x, which is lower than the industry average of 19.8x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Man Industries (India)
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 MANINDS
Price-Earnings Ratio = Price per share ÷ Earnings per share
MANINDS Price-Earnings Ratio = ₹117.7 ÷ ₹11.12 = 10.6x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MANINDS, 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 MANINDS’s P/E of 10.6x is lower than its industry peers (19.8x), it means that investors are paying less than they should for each dollar of MANINDS’s earnings. Therefore, according to this analysis, MANINDS is an under-priced stock.
A few caveats
However, before you rush out to buy MANINDS, 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 MANINDS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with MANINDS, 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 MANINDS to are fairly valued by the market. If this is violated, MANINDS’s P/E may be lower than its peers as they are actually overvalued by investors.
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 add more of MANINDS to your portfolio. 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 urge you to complete your research by taking a look at the following: