In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Remsons Industries Limited (NSE:REMSONSIND) is trading with a trailing P/E of 19.1, which is close to the industry average of 19. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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 Remsons Industries
Breaking down the Price-Earnings 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 REMSONSIND
Price-Earnings Ratio = Price per share ÷ Earnings per share
REMSONSIND Price-Earnings Ratio = ₹140 ÷ ₹7.338 = 19.1x
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 REMSONSIND, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Remsons Industries Limited (NSE:REMSONSIND) is trading with a trailing P/E of 19.1, which is close to the industry average of 19. This multiple is a median of profitable companies of 25 Auto Components companies in IN including Ucal Fuel Systems, IST and Enterprises. You can think of it like this: the market is suggesting that REMSONSIND has similar prospects to its peers in the same industry.
Assumptions to be aware of
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to REMSONSIND. If not, the difference in P/E might be a result of other factors. For example, Remsons Industries Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with REMSONSIND are not fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.