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Does Freedom Insurance Group Ltd’s (ASX:FIG) PE Ratio Signal A Buying Opportunity?

Freedom Insurance Group Ltd (ASX:FIG) trades with a trailing P/E of 6.8x, which is lower than the industry average of 19.2x. While FIG might seem like an attractive stock to buy, 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. See our latest analysis for Freedom Insurance Group

Demystifying the P/E ratio

ASX:FIG PE PEG Gauge Jun 21st 18
ASX:FIG PE PEG Gauge Jun 21st 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.

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P/E Calculation for FIG

Price-Earnings Ratio = Price per share ÷ Earnings per share

FIG Price-Earnings Ratio = A$0.45 ÷ A$0.065 = 6.8x

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 FIG, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 6.8x, FIG’s P/E is lower than its industry peers (19.2x). This implies that investors are undervaluing each dollar of FIG’s earnings. Therefore, according to this analysis, FIG is an under-priced stock.

A few caveats

Before you jump to the conclusion that FIG is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to FIG, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FIG, 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 FIG to are fairly valued by the market. If this is violated, FIG’s P/E may be lower than its peers as they are actually overvalued by investors.

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 FIG. 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 urge you to complete your research by taking a look at the following:

  1. Future Outlook: What are well-informed industry analysts predicting for FIG’s future growth? Take a look at our free research report of analyst consensus for FIG’s outlook.

  2. Financial Health: Is FIG’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

  3. 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.