This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Zodiac-JRD-MKJ Limited (NSE:ZODJRDMKJ) is currently trading at a trailing P/E of 24.8, 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 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 Zodiac-JRD-MKJ
What you need to know about 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 ZODJRDMKJ
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZODJRDMKJ Price-Earnings Ratio = ₹36.25 ÷ ₹1.463 = 24.8x
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 ZODJRDMKJ, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. ZODJRDMKJ’s P/E of 24.8 is higher than its industry peers (14), which implies that each dollar of ZODJRDMKJ’s earnings is being overvalued by investors. 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 also say that the market is suggesting that ZODJRDMKJ is a stronger business than the average comparable company.
Assumptions to be aware of
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to ZODJRDMKJ. If not, the difference in P/E might be a result of other factors. For example, Zodiac-JRD-MKJ Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to ZODJRDMKJ 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.