In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Xpro India Limited (NSE:XPROINDIA) is trading with a trailing P/E of 4.1x, which is lower than the industry average of 16.1x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Xpro 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. 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 XPROINDIA
Price-Earnings Ratio = Price per share ÷ Earnings per share
XPROINDIA Price-Earnings Ratio = ₹37.05 ÷ ₹8.97 = 4.1x
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 XPROINDIA, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 4.1, XPROINDIA’s P/E is lower than its industry peers (16.1). This implies that investors are undervaluing each dollar of XPROINDIA’s earnings. This multiple is a median of profitable companies of 24 Chemicals companies in IN including Anil, Mysore Petro Chemicals and Hindcon Chemicals. You can think of it like this: the market is suggesting that XPROINDIA is a weaker business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to XPROINDIA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with XPROINDIA, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing XPROINDIA to are fairly valued by the market. If this does not hold, there is a possibility that XPROINDIA’s P/E is lower because our peer group is overvalued by the market.