In This Article:
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Hindustan Copper Limited (NSE:HINDCOPPER) trades with a trailing P/E of 49, which is higher than the industry average of 12.8. 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.
See our latest analysis for Hindustan Copper
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 HINDCOPPER
Price-Earnings Ratio = Price per share ÷ Earnings per share
HINDCOPPER Price-Earnings Ratio = ₹55.65 ÷ ₹1.135 = 49x
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 HINDCOPPER, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since HINDCOPPER’s P/E of 49 is higher than its industry peers (12.8), it means that investors are paying more for each dollar of HINDCOPPER’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in IN including Bhoruka Aluminium, Golkonda Aluminium Extrusions and Mukand. You could think of it like this: the market is pricing HINDCOPPER as if it is a stronger company than the average of its industry group.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. The first is that our “similar companies” are actually similar to HINDCOPPER. If not, the difference in P/E might be a result of other factors. For example, if Hindustan Copper 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 HINDCOPPER 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.