This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Jubilant Life Sciences Limited (NSE:JUBILANT) trades with a trailing P/E of 15.2x, which is lower than the industry average of 21.9x. While JUBILANT 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Jubilant Life Sciences
What you need to know about 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 JUBILANT
Price-Earnings Ratio = Price per share ÷ Earnings per share
JUBILANT Price-Earnings Ratio = ₹682.6 ÷ ₹44.81 = 15.2x
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 JUBILANT, 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. At 15.2, JUBILANT’s P/E is lower than its industry peers (21.9). This implies that investors are undervaluing each dollar of JUBILANT’s earnings. This multiple is a median of profitable companies of 25 Pharmaceuticals companies in IN including Vasundhara Rasayans, Vivimed Labs and Beryl Drugs. You can think of it like this: the market is suggesting that JUBILANT is a weaker business than the average comparable company.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to JUBILANT, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with JUBILANT, 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 JUBILANT to are fairly valued by the market. If this does not hold, there is a possibility that JUBILANT’s P/E is lower because our peer group is overvalued by the market.