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Is It Too Late To Consider Buying National Tyre & Wheel Limited (ASX:NTD)?

National Tyre & Wheel Limited (ASX:NTD), is not the largest company out there, but it received a lot of attention from a substantial price increase on the ASX over the last few months. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on National Tyre & Wheel’s outlook and valuation to see if the opportunity still exists.

Check out our latest analysis for National Tyre & Wheel

Is National Tyre & Wheel still cheap?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that National Tyre & Wheel’s ratio of 19.22x is trading slightly above its industry peers’ ratio of 18.37x, which means if you buy National Tyre & Wheel today, you’d be paying a relatively reasonable price for it. And if you believe that National Tyre & Wheel should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Although, there may be an opportunity to buy in the future. This is because National Tyre & Wheel’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

What does the future of National Tyre & Wheel look like?

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earnings-and-revenue-growth

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. In National Tyre & Wheel's case, its revenues over the next couple of years are expected to double, indicating an incredibly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? NTD’s optimistic future growth appears to have been factored into the current share price, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at NTD? Will you have enough confidence to invest in the company should the price drop below the industry PE ratio?

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Are you a potential investor? If you’ve been keeping an eye on NTD, now may not be the most optimal time to buy, given it is trading around industry price multiples. However, the optimistic forecast is encouraging for NTD, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.

Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. Case in point: We've spotted 4 warning signs for National Tyre & Wheel you should be aware of.

If you are no longer interested in National Tyre & Wheel, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.