Yahoo Finance Does SKYCITY Entertainment Group Limited’s (NZSE:SKC) PE Ratio Signal A Selling Opportunity?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in SKYCITY Entertainment Group Limited (NZSE:SKC).
SKYCITY Entertainment Group Limited (NZSE:SKC) is currently trading at a trailing P/E of 49.2x, which is higher than the industry average of 25.3x. While this makes SKC 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. 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 SKYCITY Entertainment 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 SKC
Price-Earnings Ratio = Price per share ÷ Earnings per share
SKC Price-Earnings Ratio = NZ$4.02 ÷ NZ$0.0816 = 49.2x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SKC, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. SKC’s P/E of 49.2x is higher than its industry peers (21.8x), which implies that each dollar of SKC’s earnings is being overvalued by investors. Therefore, according to this analysis, SKC is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your SKC shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SKC, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with SKC, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing SKC to are fairly valued by the market. If this is violated, SKC’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 rebalance your portfolio and reduce your holdings in SKC. 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 SKC’s future growth? Take a look at our free research report of analyst consensus for SKC’s outlook.
Past Track Record: Has SKC 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 SKC’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.
