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Anjani Portland Cement Limited (NSEI:APCL) is trading with a trailing P/E of 13.4x, which is lower than the industry average of 27.2x. While this makes APCL appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Anjani Portland Cement
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 APCL
Price-Earnings Ratio = Price per share ÷ Earnings per share
APCL Price-Earnings Ratio = ₹197.5 ÷ ₹14.686 = 13.4x
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 APCL, 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 13.4x, APCL’s P/E is lower than its industry peers (27.2x). This implies that investors are undervaluing each dollar of APCL’s earnings. Therefore, according to this analysis, APCL is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that APCL is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to APCL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with APCL, 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 APCL to are fairly valued by the market. If this does not hold, there is a possibility that APCL’s P/E is lower because our peer group is overpriced by the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.