Should You Be Tempted To Sell Future Enterprises Limited (NSE:FEL) At Its Current PE Ratio?
In This Article:
Future Enterprises Limited (NSEI:FEL) is trading with a trailing P/E of 52.1x, which is higher than the industry average of 32.5x. While FEL 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Future Enterprises
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 FEL
Price-Earnings Ratio = Price per share ÷ Earnings per share
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FEL Price-Earnings Ratio = ₹38.65 ÷ ₹0.742 = 52.1x
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 FEL, 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. FEL’s P/E of 52.1x is higher than its industry peers (32.5x), which implies that each dollar of FEL’s earnings is being overvalued by investors. Therefore, according to this analysis, FEL is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that FEL should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to FEL. 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 FEL, 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 FEL to are fairly valued by the market. If this does not hold true, FEL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on FEL, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 urge you to complete your research by taking a look at the following: