Yahoo Finance Is Pets at Home Group Plc’s (LON:PETS) 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 start learning about core concepts of fundamental analysis on practical examples from today’s market.
Pets at Home Group Plc (LON:PETS) is trading with a trailing P/E of 9.6x, which is lower than the industry average of 11.3x. While this makes PETS 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 at Home Group
What you need to know about 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 PETS
Price-Earnings Ratio = Price per share ÷ Earnings per share
PETS Price-Earnings Ratio = £1.21 ÷ £0.126 = 9.6x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PETS, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since PETS’s P/E of 9.6 is lower than its industry peers (11.3), it means that investors are paying less for each dollar of PETS’s earnings. This multiple is a median of profitable companies of 24 Specialty Retail companies in GB including United Carpets Group, Cambria Automobiles and Vertu Motors. You can think of it like this: the market is suggesting that PETS is a weaker business than the average comparable company.
A few caveats
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PETS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PETS, 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 PETS to are fairly valued by the market. If this is violated, PETS’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of PETS to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 PETS’s future growth? Take a look at our free research report of analyst consensus for PETS’s outlook.
Past Track Record: Has PETS 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 PETS’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.
