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Sanofi India Limited (NSEI:SANOFI) is currently trading at a trailing P/E of 36.4x, which is higher than the industry average of 26.5x. While SANOFI might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, 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 Sanofi India
Demystifying 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. 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 SANOFI
Price-Earnings Ratio = Price per share ÷ Earnings per share
SANOFI Price-Earnings Ratio = ₹5163.05 ÷ ₹141.74 = 36.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 SANOFI, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 36.4x, SANOFI’s P/E is higher than its industry peers (26.5x). This implies that investors are overvaluing each dollar of SANOFI’s earnings. Therefore, according to this analysis, SANOFI is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your SANOFI shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to SANOFI, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with SANOFI, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SANOFI to are fairly valued by the market. If this is violated, SANOFI’s P/E may be lower than its peers as they are actually overvalued by investors.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.