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Should You Buy Tata Motors Limited (NSE:TATAMTRDVR) At This PE Ratio?

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 begin learning the link between Tata Motors Limited (NSE:TATAMTRDVR)’s fundamentals and stock market performance.

Tata Motors Limited (NSE:TATAMTRDVR) trades with a trailing P/E of 17x, which is lower than the industry average of 0x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Tata Motors

Demystifying the P/E ratio

NSEI:TATAMTRDVR PE PEG Gauge June 25th 18
NSEI:TATAMTRDVR PE PEG Gauge June 25th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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.

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P/E Calculation for TATAMTRDVR

Price-Earnings Ratio = Price per share ÷ Earnings per share

TATAMTRDVR Price-Earnings Ratio = ₹305.6 ÷ ₹18.026 = 17x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TATAMTRDVR, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. TATAMTRDVR’s P/E of 17x is lower than its industry peers (18.4x), which implies that each dollar of TATAMTRDVR’s earnings is being undervalued by investors. As such, our analysis shows that TATAMTRDVR represents an under-priced stock.

A few caveats

Before you jump to the conclusion that TATAMTRDVR is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to TATAMTRDVR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with TATAMTRDVR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TATAMTRDVR to are fairly valued by the market. If this does not hold, there is a possibility that TATAMTRDVR’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to TATAMTRDVR. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for TATAMTRDVR’s future growth? Take a look at our free research report of analyst consensus for TATAMTRDVR’s outlook.

  2. Past Track Record: Has TATAMTRDVR 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 TATAMTRDVR’s historicals for more clarity.

  3. 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.