Yahoo Finance Is PGG Wrightson Limited’s (NZE:PGW) PE Ratio A Signal To Buy For Investors?
PGG Wrightson Limited (NZSE:PGW) is currently trading at a trailing P/E of 11.9x, which is lower than the industry average of 15.8x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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. Check out our latest analysis for PGG Wrightson
Breaking down the Price-Earnings 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 PGW
Price-Earnings Ratio = Price per share ÷ Earnings per share
PGW Price-Earnings Ratio = NZ$0.71 ÷ NZ$0.06 = 11.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PGW, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. PGW’s P/E of 11.9x is lower than its industry peers (15.8x), which implies that each dollar of PGW’s earnings is being undervalued by investors. Therefore, according to this analysis, PGW is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that PGW is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to PGW, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PGW, 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 PGW to are fairly valued by the market. If this is violated, PGW’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on PGW, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 PGW’s future growth? Take a look at our free research report of analyst consensus for PGW’s outlook.
Past Track Record: Has PGW 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 PGW’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.
