In This Article:
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 better understand how you can grow your money by investing in Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU).
Kabra Extrusiontechnik Limited (NSE:KABRAEXTRU) is trading with a trailing P/E of 16.5x, which is lower than the industry average of 26.3x. While this makes KABRAEXTRU appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Kabra Extrusiontechnik
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 KABRAEXTRU
Price-Earnings Ratio = Price per share ÷ Earnings per share
KABRAEXTRU Price-Earnings Ratio = ₹103.7 ÷ ₹6.27 = 16.5x
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 KABRAEXTRU, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since KABRAEXTRU’s P/E of 16.5x is lower than its industry peers (26.3x), it means that investors are paying less than they should for each dollar of KABRAEXTRU’s earnings. Therefore, according to this analysis, KABRAEXTRU is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy KABRAEXTRU immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to KABRAEXTRU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with KABRAEXTRU, 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 KABRAEXTRU to are fairly valued by the market. If this is violated, KABRAEXTRU’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to KABRAEXTRU. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: