In This Article:
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Jubilant FoodWorks Limited (NSE:JUBLFOOD) is trading with a trailing P/E of 72.2, which is higher than the industry average of 24.7. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. In this article, 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 Jubilant FoodWorks
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 JUBLFOOD
Price-Earnings Ratio = Price per share ÷ Earnings per share
JUBLFOOD Price-Earnings Ratio = ₹1074.1 ÷ ₹14.871 = 72.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to JUBLFOOD, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. JUBLFOOD’s P/E of 72.2 is higher than its industry peers (24.7), which implies that each dollar of JUBLFOOD’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 25 Hospitality companies in IN including Dharani Finance, Thomas Cook (India) and Talwalkars Lifestyles. You could think of it like this: the market is pricing JUBLFOOD as if it is a stronger company than the average of its industry group.
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 JUBLFOOD. If not, the difference in P/E might be a result of other factors. Take, for example, the scenario where Jubilant FoodWorks 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. Of course, it is possible that the stocks we are comparing with JUBLFOOD are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.