Yahoo Finance Should You Be Tempted To Buy Tredegar Corporation (NYSE:TG) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Tredegar Corporation (NYSE:TG).
Tredegar Corporation (NYSE:TG) is trading with a trailing P/E of 14.7x, which is lower than the industry average of 16.7x. While this makes TG appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Tredegar
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 TG
Price-Earnings Ratio = Price per share ÷ Earnings per share
TG Price-Earnings Ratio = $23.45 ÷ $1.599 = 14.7x
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 TG, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since TG’s P/E of 14.7x is lower than its industry peers (16.7x), it means that investors are paying less than they should for each dollar of TG’s earnings. Therefore, according to this analysis, TG is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy TG immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to TG, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TG, 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 TG to are fairly valued by the market. If this is violated, TG’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on TG, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for TG’s future growth? Take a look at our free research report of analyst consensus for TG’s outlook.
Past Track Record: Has TG 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 TG’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.