Yahoo Finance Is St Modwen Properties PLC’s (LON:SMP) PE Ratio A Signal To Sell For Investors?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
St Modwen Properties PLC (LON:SMP) trades with a trailing P/E of 16, which is higher than the industry average of 10.2. 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for St. Modwen Properties
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 SMP
Price-Earnings Ratio = Price per share ÷ Earnings per share
SMP Price-Earnings Ratio = £3.87 ÷ £0.242 = 16x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SMP, 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 SMP’s P/E of 16 is higher than its industry peers (10.2), it means that investors are paying more for each dollar of SMP’s earnings. This multiple is a median of profitable companies of 24 Real Estate companies in GB including Arricano Real Estate, Safeland and PJSC LSR Group. You could also say that the market is suggesting that SMP is a stronger business than the average comparable company.
Assumptions to be aware of
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 SMP. If not, the difference in P/E might be a result of other factors. For example, if St Modwen Properties 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 SMP may not be fairly valued. Thus while we might conclude that it is richly valued relative to its peers, that could be explained by the peer group being 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 SMP. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SMP’s future growth? Take a look at our free research report of analyst consensus for SMP’s outlook.
Past Track Record: Has SMP 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 SMP’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.
