In This Article:
Arvind SmartSpaces Limited (NSEI:ARVSMART) is trading with a trailing P/E of 17.8x, which is lower than the industry average of 26x. While ARVSMART might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Arvind SmartSpaces
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 ARVSMART
Price-Earnings Ratio = Price per share ÷ Earnings per share
ARVSMART Price-Earnings Ratio = ₹190.2 ÷ ₹10.714 = 17.8x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ARVSMART, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. ARVSMART’s P/E of 17.8x is lower than its industry peers (26x), which implies that each dollar of ARVSMART’s earnings is being undervalued by investors. Therefore, according to this analysis, ARVSMART is an under-priced stock.
A few caveats
However, before you rush out to buy ARVSMART, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ARVSMART. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with ARVSMART, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing ARVSMART to are fairly valued by the market. If this does not hold true, ARVSMART’s lower P/E ratio may be because firms in our peer group are 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.