Yahoo Finance Should You Be Tempted To Buy Investec plc (LON:INVP) At Its Current PE Ratio?
Investec plc (LSE:INVP) is trading with a trailing P/E of 11.6x, which is lower than the industry average of 15.6x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Investec
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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.
P/E Calculation for INVP
Price-Earnings Ratio = Price per share ÷ Earnings per share
INVP Price-Earnings Ratio = £5.95 ÷ £0.512 = 11.6x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as INVP, 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 INVP’s P/E of 11.6x is lower than its industry peers (15.6x), it means that investors are paying less than they should for each dollar of INVP’s earnings. As such, our analysis shows that INVP represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy INVP immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to INVP, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with INVP, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing INVP to are fairly valued by the market. If this is violated, INVP’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
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 INVP 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. 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 INVP’s future growth? Take a look at our free research report of analyst consensus for INVP’s outlook.
Past Track Record: Has INVP 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 INVP’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.
