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.
M K Proteins Limited (NSE:MKPL) is currently trading at a trailing P/E of 21.1, which is close to the industry average of 20.2. 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 explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for M. K. Proteins
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 MKPL
Price-Earnings Ratio = Price per share ÷ Earnings per share
MKPL Price-Earnings Ratio = ₹72 ÷ ₹3.42 = 21.1x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to MKPL, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. M K Proteins Limited (NSE:MKPL) is trading with a trailing P/E of 21.1, which is close to the industry average of 20.2. This multiple is a median of profitable companies of 25 Food companies in IN including Halder Venture, Kwality and Ovobel Foods. One could put it like this: the market is pricing MKPL as if it is roughly average for its industry.
A few caveats
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to MKPL. If this isn’t the case, the difference in P/E could be due to other factors. For example, M K Proteins 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. Of course, it is possible that the stocks we are comparing with MKPL are not 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.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in MKPL. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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: