Yahoo Finance What Does EBOS Group Limited’s (NZSE:EBO) PE Ratio Tell You?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
EBOS Group Limited (NZSE:EBO) is trading with a trailing P/E of 23, which is higher than the industry average of 10.8. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.
Check out our latest analysis for EBOS Group
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for EBO
Price-Earnings Ratio = Price per share ÷ Earnings per share
EBO Price-Earnings Ratio = NZ$22.61 ÷ NZ$0.985 = 23x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as EBO, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since EBO’s P/E of 23 is higher than its industry peers (10.8), it means that investors are paying more for each dollar of EBO’s earnings. This multiple is a median of profitable companies of 6 Healthcare companies in NZ including Summerset Group Holdings, Arvida Group and Oceania Healthcare. You could think of it like this: the market is pricing EBO as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, it is important to note that our examination of the stock is based on certain assumptions. Firstly, that our peer group contains companies that are similar to EBO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if EBOS Group Limited is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to EBO may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.
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 EBO. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for EBO’s future growth? Take a look at our free research report of analyst consensus for EBO’s outlook.
Past Track Record: Has EBO 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 EBO’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.
