Yahoo Finance Should You Be Tempted To Buy H&R Block Inc (NYSE:HRB) Because Of Its PE Ratio?
H&R Block Inc (NYSE:HRB) is currently trading at a trailing P/E of 23x, which is lower than the industry average of 25.7x. While HRB 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for H&R Block
Demystifying 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 HRB
Price-Earnings Ratio = Price per share ÷ Earnings per share
HRB Price-Earnings Ratio = $29.38 ÷ $1.279 = 23x
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 HRB, 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. HRB’s P/E of 23x is lower than its industry peers (25.7x), which implies that each dollar of HRB’s earnings is being undervalued by investors. Therefore, according to this analysis, HRB is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy HRB immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to HRB. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with HRB, 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 HRB to are fairly valued by the market. If this does not hold true, HRB’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on HRB, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HRB’s future growth? Take a look at our free research report of analyst consensus for HRB’s outlook.
Past Track Record: Has HRB 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 HRB’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.
