Yahoo Finance Is Ei Group plc’s (LON:EIG) PE Ratio A Signal To Buy For Investors?
Ei Group plc (LSE:EIG) trades with a trailing P/E of 8.5x, which is lower than the industry average of 19.2x. While this makes EIG 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Ei Group
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 EIG
Price-Earnings Ratio = Price per share ÷ Earnings per share
EIG Price-Earnings Ratio = £1.44 ÷ £0.17 = 8.5x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to EIG, 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. Since EIG’s P/E of 8.5x is lower than its industry peers (19.2x), it means that investors are paying less than they should for each dollar of EIG’s earnings. Therefore, according to this analysis, EIG is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy EIG immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to EIG. 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 EIG, 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 EIG to are fairly valued by the market. If this does not hold, there is a possibility that EIG’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 EIG. 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 EIG’s future growth? Take a look at our free research report of analyst consensus for EIG’s outlook.
Past Track Record: Has EIG 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 EIG’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.
