In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Pidilite Industries Limited (NSE:PIDILITIND) is trading with a trailing P/E of 58.6, which is higher than the industry average of 17.9. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for Pidilite Industries
Demystifying 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 PIDILITIND
Price-Earnings Ratio = Price per share ÷ Earnings per share
PIDILITIND Price-Earnings Ratio = ₹1127.05 ÷ ₹19.234 = 58.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PIDILITIND, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 58.6, PIDILITIND’s P/E is higher than its industry peers (17.9). This implies that investors are overvaluing each dollar of PIDILITIND’s earnings. This multiple is a median of profitable companies of 25 Chemicals companies in IN including Anil, Mysore Petro Chemicals and Hindcon Chemicals. You could think of it like this: the market is pricing PIDILITIND 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 PIDILITIND. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Pidilite Industries Limited is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to PIDILITIND may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.