Yahoo Finance Does SSE plc’s (LON:SSE) PE Ratio Signal A Selling Opportunity?
SSE plc (LSE:SSE) is trading with a trailing P/E of 16.6x, which is higher than the industry average of 13.5x. While SSE might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for SSE
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 pound of the company’s earnings.
P/E Calculation for SSE
Price-Earnings Ratio = Price per share ÷ Earnings per share
SSE Price-Earnings Ratio = £13.46 ÷ £0.813 = 16.6x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SSE, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since SSE’s P/E of 16.6x is higher than its industry peers (13.5x), it means that investors are paying more than they should for each dollar of SSE’s earnings. As such, our analysis shows that SSE represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that SSE should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to SSE, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SSE, 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 SSE to are fairly valued by the market. If this does not hold true, SSE’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 SSE, the overvaluation of the stock may mean it is a good time to reduce 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 SSE’s future growth? Take a look at our free research report of analyst consensus for SSE’s outlook.
Past Track Record: Has SSE 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 SSE’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.
