In This Article:
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Zensar Technologies Limited (NSE:ZENSARTECH)’s fundamentals and stock market performance.
Zensar Technologies Limited (NSE:ZENSARTECH) is currently trading at a trailing P/E of 23.5x, which is higher than the industry average of 20.7x. While ZENSARTECH 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Zensar Technologies
Demystifying 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. 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 ZENSARTECH
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZENSARTECH Price-Earnings Ratio = ₹1261.05 ÷ ₹53.76 = 23.5x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ZENSARTECH, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. ZENSARTECH’s P/E of 23.5x is higher than its industry peers (20.7x), which implies that each dollar of ZENSARTECH’s earnings is being overvalued by investors. Therefore, according to this analysis, ZENSARTECH is an over-priced stock.
A few caveats
However, before you rush out to sell your ZENSARTECH shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ZENSARTECH. 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 ZENSARTECH, 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 ZENSARTECH to are fairly valued by the market. If this does not hold true, ZENSARTECH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.