Yahoo Finance Is Ciena Corporation’s (NYSE:CIEN) PE Ratio A Signal To Buy For Investors?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Ciena Corporation (NYSE:CIEN) trades with a trailing P/E of 5.1x, which is lower than the industry average of 29.8x. While CIEN might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
View our latest analysis for Ciena
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 CIEN
Price-Earnings Ratio = Price per share ÷ Earnings per share
CIEN Price-Earnings Ratio = $27.31 ÷ $5.305 = 5.1x
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 CIEN, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since CIEN’s P/E of 5.1 is lower than its industry peers (29.8), it means that investors are paying less for each dollar of CIEN’s earnings. This multiple is a median of profitable companies of 24 Communications companies in US including GuanHua, Inventergy Global and Novra Technologies. You can think of it like this: the market is suggesting that CIEN is a weaker business than the average comparable company.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CIEN, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CIEN, 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 CIEN to are fairly valued by the market. If this does not hold, there is a possibility that CIEN’s P/E is lower because our peer group is 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 CIEN 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 CIEN’s future growth? Take a look at our free research report of analyst consensus for CIEN’s outlook.
Past Track Record: Has CIEN 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 CIEN’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.
