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Is It Time To Buy Veritas Investments Limited (NZE:VIL) Based Off Its PE Ratio?

Veritas Investments Limited (NZSE:VIL) trades with a trailing P/E of 1.5x, which is lower than the industry average of 27.2x. While this makes VIL appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Veritas Investments

Breaking down the P/E ratio

NZSE:VIL PE PEG Gauge Jun 7th 18
NZSE:VIL PE PEG Gauge Jun 7th 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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.

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P/E Calculation for VIL

Price-Earnings Ratio = Price per share ÷ Earnings per share

VIL Price-Earnings Ratio = NZ$0.13 ÷ NZ$0.084 = 1.5x

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 VIL, 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. Since VIL’s P/E of 1.5x is lower than its industry peers (27.2x), it means that investors are paying less than they should for each dollar of VIL’s earnings. Therefore, according to this analysis, VIL is an under-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to buy VIL immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to VIL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with VIL, 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 VIL to are fairly valued by the market. If this does not hold true, VIL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.

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 add more of VIL to your portfolio. 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:

  1. Financial Health: Is VIL’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

  2. Past Track Record: Has VIL 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 VIL’s historicals for more clarity.

  3. 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.