Yahoo Finance Does Bosch Limited’s (NSE:BOSCHLTD) PE Ratio Warrant A Sell?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Bosch Limited (NSE:BOSCHLTD)’s fundamentals and stock market performance.
Bosch Limited (NSE:BOSCHLTD) is trading with a trailing P/E of 39.9x, which is higher than the industry average of 24.3x. While BOSCHLTD might seem like a stock to avoid or sell if you own it, 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 Bosch
Breaking down the Price-Earnings ratio
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.
P/E Calculation for BOSCHLTD
Price-Earnings Ratio = Price per share ÷ Earnings per share
BOSCHLTD Price-Earnings Ratio = ₹17931.35 ÷ ₹449.2 = 39.9x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BOSCHLTD, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since BOSCHLTD’s P/E of 39.9x is higher than its industry peers (24.3x), it means that investors are paying more than they should for each dollar of BOSCHLTD’s earnings. Therefore, according to this analysis, BOSCHLTD is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that BOSCHLTD should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to BOSCHLTD. 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 BOSCHLTD, 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 BOSCHLTD to are fairly valued by the market. If this is violated, BOSCHLTD’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 rebalance your portfolio and reduce your holdings in BOSCHLTD. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BOSCHLTD’s future growth? Take a look at our free research report of analyst consensus for BOSCHLTD’s outlook.
Past Track Record: Has BOSCHLTD 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 BOSCHLTD’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.
