In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Orbit Exports Limited (NSE:ORBTEXP) is trading with a trailing P/E of 14.8, which is higher than the industry average of 14. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Orbit Exports
Breaking down the Price-Earnings 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 ORBTEXP
Price-Earnings Ratio = Price per share ÷ Earnings per share
ORBTEXP Price-Earnings Ratio = ₹140 ÷ ₹9.429 = 14.8x
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 ORBTEXP, 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. At 14.8, ORBTEXP’s P/E is higher than its industry peers (14). This implies that investors are overvaluing each dollar of ORBTEXP’s earnings. This multiple is a median of profitable companies of 25 Luxury companies in IN including Alka India, Advance Lifestyles and Lypsa Gems & Jewellery. You could think of it like this: the market is pricing ORBTEXP as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to ORBTEXP. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where Orbit Exports Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. Of course, it is possible that the stocks we are comparing with ORBTEXP are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.