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.

Akash Infra-Projects Limited (NSE:AKASH) trades with a trailing P/E of 30.8, which is higher than the industry average of 19.3. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Akash Infra-Projects

Breaking down 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 AKASH

Price-Earnings Ratio = Price per share ÷ Earnings per share

AKASH Price-Earnings Ratio = ₹79.45 ÷ ₹2.578 = 30.8x

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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AKASH, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 30.8, AKASH’s P/E is higher than its industry peers (19.3). This implies that investors are overvaluing each dollar of AKASH’s earnings. This multiple is a median of profitable companies of 25 Construction companies in IN including ATV Projects India, East Buildtech and CMM Infraprojects. You could also say that the market is suggesting that AKASH is a stronger business than the average comparable company.

Assumptions to be aware of

However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to AKASH. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Akash Infra-Projects Limited is growing profits more quickly than the average comparable company. In that case, the market may be correct to value it on a higher P/E ratio. We should also be aware that the stocks we are comparing to AKASH may not be 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.