Yahoo Finance Does GWA Group Limited’s (ASX:GWA) PE Ratio Signal A Buying Opportunity?
GWA Group Limited (ASX:GWA) is trading with a trailing P/E of 16.7x, which is lower than the industry average of 23.1x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for GWA Group
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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.
P/E Calculation for GWA
Price-Earnings Ratio = Price per share ÷ Earnings per share
GWA Price-Earnings Ratio = A$3.5 ÷ A$0.21 = 16.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GWA, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 16.7x, GWA’s P/E is lower than its industry peers (23.1x). This implies that investors are undervaluing each dollar of GWA’s earnings. As such, our analysis shows that GWA represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy GWA, 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 GWA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with GWA, 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 GWA to are fairly valued by the market. If this does not hold, there is a possibility that GWA’s P/E is lower because our peer group is overvalued by the market.
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 GWA 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 GWA’s future growth? Take a look at our free research report of analyst consensus for GWA’s outlook.
Past Track Record: Has GWA 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 GWA’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.
