Yahoo Finance Does America’s Car-Mart Inc’s (NASDAQ:CRMT) PE Ratio Signal A Buying Opportunity?
America’s Car-Mart Inc (NASDAQ:CRMT) is currently trading at a trailing P/E of 12.7x, which is lower than the industry average of 20.1x. While this makes CRMT 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for America’s Car-Mart
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 CRMT
Price-Earnings Ratio = Price per share ÷ Earnings per share
CRMT Price-Earnings Ratio = $64.25 ÷ $5.043 = 12.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CRMT, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 12.7x, CRMT’s P/E is lower than its industry peers (20.1x). This implies that investors are undervaluing each dollar of CRMT’s earnings. Therefore, according to this analysis, CRMT is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy CRMT immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CRMT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CRMT, 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 CRMT to are fairly valued by the market. If this is violated, CRMT’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 add more of CRMT to your portfolio. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CRMT’s future growth? Take a look at our free research report of analyst consensus for CRMT’s outlook.
Past Track Record: Has CRMT 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 CRMT’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.
