Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6515
    -0.0004 (-0.05%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • Bitcoin AUD

    107,715.22
    -1,024.00 (-0.94%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6038
    +0.0004 (+0.07%)
     
  • AUD/NZD

    1.0890
    -0.0012 (-0.11%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,369.44
    +201.37 (+0.50%)
     

Does NetComm Wireless Limited’s (ASX:NTC) PE Ratio Warrant A Sell?

NetComm Wireless Limited (ASX:NTC) is trading with a trailing P/E of 48.8x, which is higher than the industry average of 26x. While this makes NTC appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for NetComm Wireless

What you need to know about the P/E ratio

ASX:NTC PE PEG Gauge May 26th 18
ASX:NTC PE PEG Gauge May 26th 18

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.

ADVERTISEMENT

P/E Calculation for NTC

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

NTC Price-Earnings Ratio = A$1.19 ÷ A$0.024 = 48.8x

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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as NTC, 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 48.8x, NTC’s P/E is higher than its industry peers (26x). This implies that investors are overvaluing each dollar of NTC’s earnings. Therefore, according to this analysis, NTC is an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your NTC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NTC. 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 NTC, 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 NTC to are fairly valued by the market. If this does not hold, there is a possibility that NTC’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 NTC, the overvaluation of the stock may mean it is a good time to reduce 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:

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

  2. Past Track Record: Has NTC 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 NTC’s historicals for more clarity.

  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.