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Does Vardhman Special Steels Limited’s (NSE:VSSL) PE Ratio Signal A Buying Opportunity?

I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.

Vardhman Special Steels Limited (NSE:VSSL) is currently trading at a trailing P/E of 13x, which is lower than the industry average of 13.9x. 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 explain what the P/E ratio is as well as what you should look out for when using it.

See our latest analysis for Vardhman Special Steels

Breaking down the P/E ratio

NSEI:VSSL PE PEG Gauge September 21st 18
NSEI:VSSL PE PEG Gauge September 21st 18

The P/E ratio is one of many ratios used in 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.

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P/E Calculation for VSSL

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

VSSL Price-Earnings Ratio = ₹121.05 ÷ ₹9.279 = 13x

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 VSSL, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 13, VSSL’s P/E is lower than its industry peers (13.9). This implies that investors are undervaluing each dollar of VSSL’s earnings. This multiple is a median of profitable companies of 25 Metals and Mining companies in IN including Bhoruka Aluminium, Golkonda Aluminium Extrusions and Mukand. One could put it like this: the market is pricing VSSL as if it is a weaker company than the average company in its industry.

Assumptions to be aware of

However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to VSSL. 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 VSSL, 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 VSSL to are fairly valued by the market. If this does not hold true, VSSL’s lower P/E ratio may be because firms in our peer group are 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 VSSL. 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 highly recommend you to complete your research by taking a look at the following:

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

  2. Past Track Record: Has VSSL 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 VSSL’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.