Yahoo Finance Should You Be Tempted To Buy The PAS Group Limited (ASX:PGR) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between The PAS Group Limited (ASX:PGR)’s fundamentals and stock market performance.
The PAS Group Limited (ASX:PGR) is currently trading at a trailing P/E of 7.4x, which is lower than the industry average of 16.3x. While this makes PGR 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 explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for PAS Group
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for PGR
Price-Earnings Ratio = Price per share ÷ Earnings per share
PGR Price-Earnings Ratio = A$0.32 ÷ A$0.0426 = 7.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 PGR, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 7.4x, PGR’s P/E is lower than its industry peers (16.3x). This implies that investors are undervaluing each dollar of PGR’s earnings. Therefore, according to this analysis, PGR is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy PGR, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PGR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PGR, 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 PGR to are fairly valued by the market. If this does not hold true, PGR’s lower P/E ratio may be because firms in our peer group are 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 PGR 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 PGR’s future growth? Take a look at our free research report of analyst consensus for PGR’s outlook.
Past Track Record: Has PGR 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 PGR’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.
