Yahoo Finance Is Legend Corporation Limited (ASX:LGD) Attractive At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Legend Corporation Limited (ASX:LGD) is trading with a trailing P/E of 12.1x, which is lower than the industry average of 15.4x. While this makes LGD appear like a great stock to buy, 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.
See our latest analysis for Legend
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 LGD
Price-Earnings Ratio = Price per share ÷ Earnings per share
LGD Price-Earnings Ratio = A$0.34 ÷ A$0.0280 = 12.1x
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 LGD, 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 12.1, LGD’s P/E is lower than its industry peers (15.4). This implies that investors are undervaluing each dollar of LGD’s earnings. This multiple is a median of profitable companies of 6 Trade Distributors companies in AU including Acrow Formwork and Construction Services, HGL and Seven Group Holdings. You can think of it like this: the market is suggesting that LGD is a weaker business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to LGD, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with LGD, 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 LGD to are fairly valued by the market. If this is violated, LGD’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 add more of LGD 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 LGD’s future growth? Take a look at our free research report of analyst consensus for LGD’s outlook.
Past Track Record: Has LGD 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 LGD’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
