Yahoo Finance What Does Synthomer plc’s (LON:SYNT) 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.
Synthomer plc (LON:SYNT) is trading with a trailing P/E of 14.8x, which is lower than the industry average of 20.2x. While this makes SYNT 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 explain what the P/E ratio is as well as what you should look out for when using it.
View our latest analysis for Synthomer
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 SYNT
Price-Earnings Ratio = Price per share ÷ Earnings per share
SYNT Price-Earnings Ratio = £4.44 ÷ £0.299 = 14.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SYNT, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 14.8, SYNT’s P/E is lower than its industry peers (20.2). This implies that investors are undervaluing each dollar of SYNT’s earnings. This multiple is a median of profitable companies of 11 Chemicals companies in GB including Carclo, Elementis and Johnson Matthey. You can think of it like this: the market is suggesting that SYNT is a weaker business than the average comparable company.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to SYNT, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SYNT, 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 SYNT to are fairly valued by the market. If this does not hold true, SYNT’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 SYNT, 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 SYNT’s future growth? Take a look at our free research report of analyst consensus for SYNT’s outlook.
Past Track Record: Has SYNT 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 SYNT’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.
