Yahoo Finance Does RBC Bearings Incorporated’s (NASDAQ:ROLL) PE Ratio Signal A Selling Opportunity?
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 better understand how you can grow your money by investing in RBC Bearings Incorporated (NASDAQ:ROLL).
RBC Bearings Incorporated (NASDAQ:ROLL) is trading with a trailing P/E of 35.2x, which is higher than the industry average of 21.9x. While this makes ROLL appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for RBC Bearings
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 ROLL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ROLL Price-Earnings Ratio = $127.94 ÷ $3.639 = 35.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ROLL, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 35.2x, ROLL’s P/E is higher than its industry peers (21.9x). This implies that investors are overvaluing each dollar of ROLL’s earnings. Therefore, according to this analysis, ROLL is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that ROLL should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ROLL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with ROLL, 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 ROLL to are fairly valued by the market. If this does not hold true, ROLL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ROLL. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 ROLL’s future growth? Take a look at our free research report of analyst consensus for ROLL’s outlook.
Past Track Record: Has ROLL 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 ROLL’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.
