Yahoo Finance Should You Be Tempted To Buy Cineworld Group plc (LON:CINE) Because Of Its PE Ratio?
Cineworld Group plc (LSE:CINE) is currently trading at a trailing P/E of 16x, which is lower than the industry average of 20.1x. While CINE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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. View our latest analysis for Cineworld 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 pound of the company’s earnings.
P/E Calculation for CINE
Price-Earnings Ratio = Price per share ÷ Earnings per share
CINE Price-Earnings Ratio = £2.63 ÷ £0.164 = 16x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CINE, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CINE’s P/E of 16x is lower than its industry peers (20.1x), which implies that each dollar of CINE’s earnings is being undervalued by investors. As such, our analysis shows that CINE represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy CINE immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CINE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with CINE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing CINE to are fairly valued by the market. If this is violated, CINE’s P/E may be lower than its peers as they are actually overvalued by investors.
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 CINE. 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 CINE’s future growth? Take a look at our free research report of analyst consensus for CINE’s outlook.
Past Track Record: Has CINE 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 CINE’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.