Yahoo Finance Does DFS Furniture plc’s (LON:DFS) PE Ratio Signal A Selling Opportunity?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
DFS Furniture plc (LON:DFS) is trading with a trailing P/E of 14.6, which is higher than the industry average of 10.5. Though this might seem to be a negative, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 DFS Furniture
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 DFS
Price-Earnings Ratio = Price per share ÷ Earnings per share
DFS Price-Earnings Ratio = £2.2 ÷ £0.151 = 14.6x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to DFS, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. DFS’s P/E of 14.6 is higher than its industry peers (10.5), which implies that each dollar of DFS’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 24 Consumer Durables companies in GB including Springfield Properties, Walker Greenbank and Crest Nicholson Holdings. You could think of it like this: the market is pricing DFS as if it is a stronger company than the average of its industry group.
Assumptions to watch out for
However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to DFS. If this isn’t the case, the difference in P/E could be due to other factors. For example, DFS Furniture plc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to DFS may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 rebalance your portfolio and reduce your holdings in DFS. 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:
Future Outlook: What are well-informed industry analysts predicting for DFS’s future growth? Take a look at our free research report of analyst consensus for DFS’s outlook.
Past Track Record: Has DFS 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 DFS’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
