In This Article:
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.
Sambhaav Media Limited (NSE:SAMBHAAV) is currently trading at a trailing P/E of 19.3, which is higher than the industry average of 17.7. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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 Sambhaav Media
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 SAMBHAAV
Price-Earnings Ratio = Price per share ÷ Earnings per share
SAMBHAAV Price-Earnings Ratio = ₹4.75 ÷ ₹0.247 = 19.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SAMBHAAV, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since SAMBHAAV’s P/E of 19.3 is higher than its industry peers (17.7), it means that investors are paying more for each dollar of SAMBHAAV’s earnings. This multiple is a median of profitable companies of 24 Media companies in IN including Filmcity Media, Focus Suites Solutions & Services and HT Media. You could think of it like this: the market is pricing SAMBHAAV as if it is a stronger company than the average of its industry group.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to SAMBHAAV. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Sambhaav Media 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. We should also be aware that the stocks we are comparing to SAMBHAAV 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.