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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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
Suven Life Sciences Limited (NSE:SUVEN) is currently trading at a trailing P/E of 28.1, which is higher than the industry average of 25.5. While this might not seem positive, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Suven Life Sciences
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 SUVEN
Price-Earnings Ratio = Price per share ÷ Earnings per share
SUVEN Price-Earnings Ratio = ₹272.95 ÷ ₹9.718 = 28.1x
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 SUVEN, 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 SUVEN’s P/E of 28.1 is higher than its industry peers (25.5), it means that investors are paying more for each dollar of SUVEN’s earnings. This multiple is a median of profitable companies of 25 Pharmaceuticals companies in IN including Vasundhara Rasayans, Vivimed Labs and Vivimed Labs. You could think of it like this: the market is pricing SUVEN as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to SUVEN. If this isn’t the case, the difference in P/E could be due to other factors. For example, Suven Life Sciences 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. We should also be aware that the stocks we are comparing to SUVEN may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being undervalued.