Valuation of Nifty FMCG and its components
2023.01.11 03:59
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The above chart compares the Price to Earnings (P/E) ratio of stocks with its sectoral index. This will help investors get an idea if a particular stock is overvalued or undervalued on a TTM basis.
In the above chart, EMAMILTD has the lowest P/E ratio of 20.51x and UBL has the highest P/E ratio of 113.22x while their index Nifty FMCG has a P/E ratio of 22.85x.
The price-to-earnings ratio is derived by dividing a stock’s current price per share by its trailing twelve months’ earnings per share. It shows what the market is willing to pay today for a stock, based on its past earnings.
An overvalued P/E can indicate a mean reversion to its average which could mean the stock could correct to its average sector P/E. While an undervalued P/E can indicate the stock could rise at least to its average sectoral P/E. However, investors should not take decisive actions only on the basis of this one factor. The P/E ratio could be a good starting point to pick the right undervalued treasures in the stock market but further due diligence is required before investing in them for the long term.
This ratio helps to determine the relative value of a company’s share on a like-to-like comparison. However, a safer and more reliable valuation multiple would be the PEG ratio which takes the growth of earnings of the Company into consideration.
Source: HCDL Research
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