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This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Prestige Estates Projects Limited (NSE:PRESTIGE) trades on a trailing P/E of 18.2. This isn’t too far from the industry average (which is 18.7). While PRESTIGE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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.
See our latest analysis for Prestige Estates Projects
Breaking down 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. 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 PRESTIGE
Price-Earnings Ratio = Price per share ÷ Earnings per share
PRESTIGE Price-Earnings Ratio = ₹193.35 ÷ ₹10.642 = 18.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PRESTIGE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Prestige Estates Projects Limited (NSE:PRESTIGE) trades on a trailing P/E of 18.2. This isn’t too far from the industry average (which is 18.7). This multiple is a median of profitable companies of 25 Real Estate companies in IN including Bronze Infra-Tech, Antariksh Industries and Indiabulls Real Estate. You can think of it like this: the market is suggesting that PRESTIGE has similar prospects to its peers in the same industry.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PRESTIGE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PRESTIGE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PRESTIGE to are fairly valued by the market. If this does not hold true, PRESTIGE’s lower P/E ratio may be because firms in our peer group are overvalued by the market.