Yahoo Finance Should You Buy Granules India Limited (NSE:GRANULES) At This PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Granules India Limited (NSE:GRANULES).
Granules India Limited (NSE:GRANULES) is trading with a trailing P/E of 16x, which is lower than the industry average of 24.7x. While this makes GRANULES appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Granules India
Breaking down the Price-Earnings 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 GRANULES
Price-Earnings Ratio = Price per share ÷ Earnings per share
GRANULES Price-Earnings Ratio = ₹87.9 ÷ ₹5.49 = 16x
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 GRANULES, 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. GRANULES’s P/E of 16x is lower than its industry peers (24.7x), which implies that each dollar of GRANULES’s earnings is being undervalued by investors. As such, our analysis shows that GRANULES represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy GRANULES immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to GRANULES, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with GRANULES, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing GRANULES to are fairly valued by the market. If this is violated, GRANULES’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of GRANULES to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GRANULES’s future growth? Take a look at our free research report of analyst consensus for GRANULES’s outlook.
Past Track Record: Has GRANULES been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of GRANULES’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
