In This Article:
Strides Shasun Limited (NSEI:STAR) is currently trading at a trailing P/E of 63.6x, which is higher than the industry average of 25x. While this makes STAR appear like a stock to avoid or sell if you own it, 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. Check out our latest analysis for Strides Shasun
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 STAR
Price-Earnings Ratio = Price per share ÷ Earnings per share
STAR Price-Earnings Ratio = ₹357.7 ÷ ₹5.627 = 63.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as STAR, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. STAR’s P/E of 63.6x is higher than its industry peers (25x), which implies that each dollar of STAR’s earnings is being overvalued by investors. Therefore, according to this analysis, STAR is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that STAR 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 STAR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with STAR, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing STAR to are fairly valued by the market. If this is violated, STAR’s P/E may be lower than its peers as they are actually overpriced by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in STAR. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following: