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.
JMC Projects (India) Limited (NSE:JMCPROJECT) is currently trading at a trailing P/E of 50.8, which is higher than the industry average of 17.5. 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for JMC Projects (India)
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 JMCPROJECT
Price-Earnings Ratio = Price per share ÷ Earnings per share
JMCPROJECT Price-Earnings Ratio = ₹405.95 ÷ ₹7.995 = 50.8x
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 JMCPROJECT, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 50.8, JMCPROJECT’s P/E is higher than its industry peers (17.5). This implies that investors are overvaluing each dollar of JMCPROJECT’s earnings. This multiple is a median of profitable companies of 25 Construction companies in IN including ATV Projects India, East Buildtech and MBL Infrastructures. You could also say that the market is suggesting that JMCPROJECT is a stronger business than the average comparable company.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to JMCPROJECT. If this isn’t the case, the difference in P/E could be due to other factors. For example, if JMC Projects (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 JMCPROJECT 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.
What this means for you:
Since you may have already conducted your due diligence on JMCPROJECT, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following: