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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.
Mawana Sugars Limited (NSE:MAWANASUG) is currently trading at a trailing P/E of 23.3, which is higher than the industry average of 20.4. 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for Mawana Sugars
Breaking down the P/E ratio
P/E is a popular ratio used for 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 MAWANASUG
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAWANASUG Price-Earnings Ratio = ₹57.3 ÷ ₹2.462 = 23.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MAWANASUG, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since MAWANASUG’s P/E of 23.3 is higher than its industry peers (20.4), it means that investors are paying more for each dollar of MAWANASUG’s earnings. This multiple is a median of profitable companies of 25 Food companies in IN including Saboo Sodium Chloro, Halder Venture and Pioneer Agro Extracts. You could also say that the market is suggesting that MAWANASUG is a stronger business than the average comparable company.
Assumptions to watch out for
Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to MAWANASUG. If this isn’t the case, the difference in P/E could be due to other factors. For example, Mawana Sugars Limited could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with MAWANASUG 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.