Yahoo Finance Is Polypipe Group plc (LON:PLP) Attractive At This PE Ratio?
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.
Polypipe Group plc (LON:PLP) trades with a trailing P/E of 16.7, which is higher than the industry average of 14.4. While this might not seem positive, 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 our latest analysis for Polypipe Group
Demystifying 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 PLP
Price-Earnings Ratio = Price per share ÷ Earnings per share
PLP Price-Earnings Ratio = £3.79 ÷ £0.227 = 16.7x
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 PLP, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. PLP’s P/E of 16.7 is higher than its industry peers (14.4), which implies that each dollar of PLP’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 10 Building companies in GB including Safestyle UK, Titon Holdings and Alumasc Group. You could also say that the market is suggesting that PLP is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to PLP. If not, the difference in P/E might be a result of other factors. For example, if Polypipe Group plc is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to PLP may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to PLP. 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 PLP’s future growth? Take a look at our free research report of analyst consensus for PLP’s outlook.
Past Track Record: Has PLP 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 PLP’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.
