Yahoo Finance Is Crown Resorts Limited’s (ASX:CWN) PE Ratio A Signal To Buy For Investors?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Crown Resorts Limited (ASX:CWN).
Crown Resorts Limited (ASX:CWN) trades with a trailing P/E of 5.5x, which is lower than the industry average of 25.3x. While this makes CWN appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Crown Resorts
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CWN
Price-Earnings Ratio = Price per share ÷ Earnings per share
CWN Price-Earnings Ratio = A$13.64 ÷ A$2.472 = 5.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CWN, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CWN’s P/E of 5.5x is lower than its industry peers (25.3x), which implies that each dollar of CWN’s earnings is being undervalued by investors. As such, our analysis shows that CWN represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that CWN 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 CWN. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CWN, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CWN to are fairly valued by the market. If this does not hold true, CWN’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 CWN. 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:
Future Outlook: What are well-informed industry analysts predicting for CWN’s future growth? Take a look at our free research report of analyst consensus for CWN’s outlook.
Past Track Record: Has CWN 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 CWN’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.
