Yahoo Finance Should You Buy IGas Energy plc (LON:IGAS) At This PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in IGas Energy plc (LON:IGAS).
IGas Energy plc (LON:IGAS) is currently trading at a trailing P/E of 7x, which is lower than the industry average of 18.2x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for IGas Energy
Breaking down the Price-Earnings 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 IGAS
Price-Earnings Ratio = Price per share ÷ Earnings per share
IGAS Price-Earnings Ratio = £0.92 ÷ £0.131 = 7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to IGAS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. IGAS’s P/E of 7x is lower than its industry peers (18.2x), which implies that each dollar of IGAS’s earnings is being undervalued by investors. Therefore, according to this analysis, IGAS is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy IGAS immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to IGAS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with IGAS, 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 IGAS to are fairly valued by the market. If this does not hold true, IGAS’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 IGAS, 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 IGAS’s future growth? Take a look at our free research report of analyst consensus for IGAS’s outlook.
Past Track Record: Has IGAS 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 IGAS’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.
