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Solar Industries India Limited (NSEI:SOLARINDS) trades with a trailing P/E of 44.6x, which is higher than the industry average of 21.3x. While this makes SOLARINDS appear like a stock to avoid or sell if you own it, 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. See our latest analysis for Solar Industries India
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 SOLARINDS
Price-Earnings Ratio = Price per share ÷ Earnings per share
SOLARINDS Price-Earnings Ratio = ₹1072.9 ÷ ₹24.068 = 44.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 SOLARINDS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. SOLARINDS’s P/E of 44.6x is higher than its industry peers (21.3x), which implies that each dollar of SOLARINDS’s earnings is being overvalued by investors. As such, our analysis shows that SOLARINDS represents an over-priced stock.
A few caveats
Before you jump to the conclusion that SOLARINDS should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to SOLARINDS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SOLARINDS, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SOLARINDS to are fairly valued by the market. If this does not hold, there is a possibility that SOLARINDS’s P/E is lower because our peer group is overvalued by the market.
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.