This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance. Sbi life insurance.
SBI Life Insurance Company Limited ( NSE:SBILIFE ) is trading with a trailing P/E of 56.8x, which is higher than the industry average of 37.4x. While this makes SBILIFE appear like a stock to avoid or sell if you own it, 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.
Breaking down the P/E ratio
NSEI:SBILIFE PE PEG Gauge July 26th 18
A common ratio used for relative valuation is the P/E ratio. 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.
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SBILIFE, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
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Since SBILIFE’s P/E of 56.8x is higher than its industry peers (37.4x), it means that investors are paying more than they should for each dollar of SBILIFE’s earnings. This multiple is a median of profitable companies of 14 Insurance companies in IN including General Insurance of India, General Insurance of India and New India Assurance. Therefore, according to this analysis, SBILIFE is an over-priced stock.
A few caveats
Before you jump to the conclusion that SBILIFE should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to SBILIFE. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing riskier firms with SBILIFE, then SBILIFE’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with SBILIFE. In this case, SBILIFE’s P/E would be higher since investors would also reward SBILIFE’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SBILIFE to are fairly valued by the market. If this does not hold, there is a possibility that SBILIFE’s P/E is higher because firms in our peer group are being undervalued by the market.
NSEI:SBILIFE Future Profit July 26th 18
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 SBILIFE. 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 SBILIFE’s future growth? Take a look at our free research report of analyst consensus for SBILIFE’s outlook.
Past Track Record: Has SBILIFE 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 SBILIFE’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 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.
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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 firstname.lastname@example.org.