Yahoo Finance Does Coca-Cola Amatil Limited’s (ASX:CCL) PE Ratio Warrant A Buy?
Coca-Cola Amatil Limited (ASX:CCL) is currently trading at a trailing P/E of 15.2x, which is lower than the industry average of 22.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, 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 Coca-Cola Amatil
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 CCL
Price-Earnings Ratio = Price per share ÷ Earnings per share
CCL Price-Earnings Ratio = A$9.07 ÷ A$0.598 = 15.2x
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 CCL, 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 CCL’s P/E of 15.2x is lower than its industry peers (22.4x), it means that investors are paying less than they should for each dollar of CCL’s earnings. As such, our analysis shows that CCL represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy CCL, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CCL, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CCL, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CCL to are fairly valued by the market. If this does not hold, there is a possibility that CCL’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on CCL, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 CCL’s future growth? Take a look at our free research report of analyst consensus for CCL’s outlook.
Past Track Record: Has CCL 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 CCL’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.
