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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
Sintercom India Limited (NSE:SINTERCOM) trades with a trailing P/E of 27.5, which is higher than the industry average of 18.7. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Sintercom India
What you need to know about the P/E 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 SINTERCOM
Price-Earnings Ratio = Price per share ÷ Earnings per share
SINTERCOM Price-Earnings Ratio = ₹62 ÷ ₹2.254 = 27.5x
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 SINTERCOM, 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 SINTERCOM’s P/E of 27.5 is higher than its industry peers (18.7), it means that investors are paying more for each dollar of SINTERCOM’s earnings. This multiple is a median of profitable companies of 25 Auto Components companies in IN including IST, Ucal Fuel Systems and Enterprises. You could also say that the market is suggesting that SINTERCOM is a stronger business than the average comparable company.
Assumptions to watch out for
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to SINTERCOM. If not, the difference in P/E might be a result of other factors. For example, if Sintercom India 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 SINTERCOM may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.