Yahoo Finance Should You Be Tempted To Buy Suncorp Group Limited (ASX:SUN) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Suncorp Group Limited (ASX:SUN).
Suncorp Group Limited (ASX:SUN) is currently trading at a trailing P/E of 19.1x, which is lower than the industry average of 19.2x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Suncorp Group
Demystifying 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 SUN
Price-Earnings Ratio = Price per share ÷ Earnings per share
SUN Price-Earnings Ratio = A$14.71 ÷ A$0.770 = 19.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SUN, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. SUN’s P/E of 19.1x is lower than its industry peers (19.2x), which implies that each dollar of SUN’s earnings is being undervalued by investors. Therefore, according to this analysis, SUN is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that SUN is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SUN. 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 SUN, 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 SUN to are fairly valued by the market. If this does not hold, there is a possibility that SUN’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 SUN, the undervaluation of the stock may mean it is a good time to top up on 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SUN’s future growth? Take a look at our free research report of analyst consensus for SUN’s outlook.
Past Track Record: Has SUN 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 SUN’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.
