This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
TTK Healthcare Limited (NSE:TTKHEALTH) is trading with a trailing P/E of 35.2, which is higher than the industry average of 25.5. 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 explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for TTK Healthcare
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 TTKHEALTH
Price-Earnings Ratio = Price per share ÷ Earnings per share
TTKHEALTH Price-Earnings Ratio = ₹980.55 ÷ ₹27.834 = 35.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TTKHEALTH, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. TTKHEALTH’s P/E of 35.2 is higher than its industry peers (25.5), which implies that each dollar of TTKHEALTH’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Pharmaceuticals companies in IN including Vasundhara Rasayans, Vivimed Labs and Vivimed Labs. You could also say that the market is suggesting that TTKHEALTH is a stronger business than the average comparable company.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to TTKHEALTH. If this isn’t the case, the difference in P/E could be due to other factors. Take, for example, the scenario where TTK Healthcare 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 TTKHEALTH may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.