In This Article:
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Vinati Organics Limited (NSE:VINATIORGA) is currently trading at a trailing P/E of 35.8, which is higher than the industry average of 16.9. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
See our latest analysis for Vinati Organics
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 VINATIORGA
Price-Earnings Ratio = Price per share ÷ Earnings per share
VINATIORGA Price-Earnings Ratio = ₹1232.8 ÷ ₹34.399 = 35.8x
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 VINATIORGA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 35.8, VINATIORGA’s P/E is higher than its industry peers (16.9). This implies that investors are overvaluing each dollar of VINATIORGA’s earnings. This multiple is a median of profitable companies of 25 Chemicals companies in IN including Anil, Mysore Petro Chemicals and Hindcon Chemicals. You could also say that the market is suggesting that VINATIORGA is a stronger business than the average comparable company.
Assumptions to be aware of
However, you should be aware that this analysis makes certain assumptions. The first is that our “similar companies” are actually similar to VINATIORGA. If not, the difference in P/E might be a result of other factors. For example, if Vinati Organics Limited is growing faster than its peers, then it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with VINATIORGA are not 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.
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 VINATIORGA. 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 urge you to complete your research by taking a look at the following: