Yahoo Finance Is Mitchells & Butlers plc’s (LON:MAB) PE Ratio A Signal To Buy For Investors?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Mitchells & Butlers plc (LON:MAB)’s fundamentals and stock market performance.
Mitchells & Butlers plc (LON:MAB) is currently trading at a trailing P/E of 18.4x, which is lower than the industry average of 19x. While this makes MAB appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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. See our latest analysis for Mitchells & Butlers
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 MAB
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAB Price-Earnings Ratio = £2.65 ÷ £0.144 = 18.4x
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 MAB, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since MAB’s P/E of 18.4x is lower than its industry peers (19x), it means that investors are paying less than they should for each dollar of MAB’s earnings. Therefore, according to this analysis, MAB is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that MAB is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to MAB, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with MAB, 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 MAB to are fairly valued by the market. If this does not hold true, MAB’s lower P/E ratio may be because firms in our peer group are 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 MAB. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for MAB’s future growth? Take a look at our free research report of analyst consensus for MAB’s outlook.
Past Track Record: Has MAB 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 MAB’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.
