Yahoo Finance Is It Time To Buy Skellerup Holdings Limited (NZE:SKL) Based Off Its PE Ratio?
Skellerup Holdings Limited (NZSE:SKL) is trading with a trailing P/E of 15.7x, which is lower than the industry average of 23.8x. While SKL 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Skellerup Holdings
Breaking down the P/E ratio
P/E is a popular ratio used for 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 SKL
Price-Earnings Ratio = Price per share ÷ Earnings per share
SKL Price-Earnings Ratio = NZ$2.03 ÷ NZ$0.129 = 15.7x
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 SKL, 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. At 15.7x, SKL’s P/E is lower than its industry peers (23.8x). This implies that investors are undervaluing each dollar of SKL’s earnings. As such, our analysis shows that SKL represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that SKL 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 SKL, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with SKL, 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 SKL to are fairly valued by the market. If this does not hold true, SKL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on SKL, 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 SKL’s future growth? Take a look at our free research report of analyst consensus for SKL’s outlook.
Past Track Record: Has SKL 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 SKL’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.
