Yahoo Finance Is The Rank Group Plc’s (LSE:RNK) PE Ratio A Signal To Buy For Investors?
The Rank Group Plc (LSE:RNK) is trading with a trailing P/E of 13.7x, which is lower than the industry average of 24.9x. While this makes RNK 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Rank Group
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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.
Formula
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for RNK
Price per share = 2.2
Earnings per share = 0.161
∴ Price-Earnings Ratio = 2.2 ÷ 0.161 = 13.7x
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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to RNK, 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 it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
Since RNK's P/E of 13.7x is lower than its industry peers (24.9x), it means that investors are paying less than they should for each dollar of RNK's earnings. As such, our analysis shows that RNK represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that RNK represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to RNK. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with RNK, then investors would naturally value RNK at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with RNK, investors would also value RNK at a lower price since it is a lower growth investment. Both scenarios would explain why RNK has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing RNK to are fairly valued by the market. If this does not hold, there is a possibility that RNK’s P/E is lower because firms in our peer group are being overvalued by the market.
What this means for you:
Are you a shareholder? 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 RNK 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.
Are you a potential investor? If you are considering investing in RNK, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Rank Group for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
