Yahoo Finance What Does Dignity plc’s (LON:DTY) PE Ratio Tell You?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Dignity plc (LON:DTY) is trading with a trailing P/E of 9.6x, which is lower than the industry average of 23.9x. While DTY 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
See our latest analysis for Dignity
Breaking down the Price-Earnings ratio
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.
P/E Calculation for DTY
Price-Earnings Ratio = Price per share ÷ Earnings per share
DTY Price-Earnings Ratio = £10.03 ÷ £1.048 = 9.6x
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 DTY, 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. DTY’s P/E of 9.6 is lower than its industry peers (23.9), which implies that each dollar of DTY’s earnings is being undervalued by investors. Since the Consumer Services sector in GB is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Anexo Group, Tribal Group and Franchise Brands. You can think of it like this: the market is suggesting that DTY is a weaker business than the average comparable company.
Assumptions to be aware of
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. Firstly, our peer group contains companies that are similar to DTY. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with DTY, 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 DTY to are fairly valued by the market. If this does not hold true, DTY’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 DTY, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for DTY’s future growth? Take a look at our free research report of analyst consensus for DTY’s outlook.
Past Track Record: Has DTY 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 DTY’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.
