Yahoo Finance Is GCP Infrastructure Investments Limited (LON:GCP) A Buy At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between GCP Infrastructure Investments Limited (LON:GCP)’s fundamentals and stock market performance.
GCP Infrastructure Investments Limited (LON:GCP) is trading with a trailing P/E of 14.8x, which is lower than the industry average of 15.4x. While GCP 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. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for GCP Infrastructure Investments
Breaking down the P/E 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 GCP
Price-Earnings Ratio = Price per share ÷ Earnings per share
GCP Price-Earnings Ratio = £1.2 ÷ £0.0809 = 14.8x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GCP, 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. GCP’s P/E of 14.8x is lower than its industry peers (15.4x), which implies that each dollar of GCP’s earnings is being undervalued by investors. Therefore, according to this analysis, GCP is an under-priced stock.
A few caveats
However, before you rush out to buy GCP, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to GCP, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with GCP, 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 GCP to are fairly valued by the market. If this is violated, GCP’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on GCP, 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GCP’s future growth? Take a look at our free research report of analyst consensus for GCP’s outlook.
Past Track Record: Has GCP 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 GCP’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.
