Yahoo Finance Does Chorus Limited’s (NZSE:CNU) PE Ratio Signal A Buying Opportunity?
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 Chorus Limited (NZSE:CNU).
Chorus Limited (NZSE:CNU) is trading with a trailing P/E of 18.3x, which is lower than the industry average of 18.7x. While this makes CNU 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Chorus
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 CNU
Price-Earnings Ratio = Price per share ÷ Earnings per share
CNU Price-Earnings Ratio = NZ$4.22 ÷ NZ$0.231 = 18.3x
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 CNU, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 18.3x, CNU’s P/E is higher than its industry peers (17.2x). This implies that investors are overvaluing each dollar of CNU’s earnings. As such, our analysis shows that CNU represents an over-priced stock.
A few caveats
Before you jump to the conclusion that CNU 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 CNU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with CNU, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing CNU to are fairly valued by the market. If this is violated, CNU’s P/E may be lower than its peers as they are actually overvalued by investors.
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 rebalance your portfolio and reduce your holdings in CNU. 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 CNU’s future growth? Take a look at our free research report of analyst consensus for CNU’s outlook.
Past Track Record: Has CNU 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 CNU’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.
