Yahoo Finance Does Capricor Therapeutics Inc’s (NASDAQ:CAPR) PE Ratio Warrant A Buy?
Capricor Therapeutics Inc (NASDAQ:CAPR) is currently trading at a trailing P/E of 13.4x, which is lower than the industry average of 25.8x. While this makes CAPR 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Capricor Therapeutics
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 CAPR
Price-Earnings Ratio = Price per share ÷ Earnings per share
CAPR Price-Earnings Ratio = $1.32 ÷ $0.099 = 13.4x
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 CAPR, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since CAPR’s P/E of 13.4x is lower than its industry peers (25.8x), it means that investors are paying less than they should for each dollar of CAPR’s earnings. As such, our analysis shows that CAPR represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that CAPR 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 CAPR, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CAPR, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing CAPR to are fairly valued by the market. If this does not hold, there is a possibility that CAPR’s P/E is lower because our peer group is 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 undervaluation could signal a good buying opportunity to increase your exposure to CAPR. 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 CAPR’s future growth? Take a look at our free research report of analyst consensus for CAPR’s outlook.
Past Track Record: Has CAPR 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 CAPR’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.
