Yahoo Finance Should You Be Tempted To Sell Hill & Smith Holdings PLC (LON:HILS) Because Of Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Hill & Smith Holdings PLC (LON:HILS).
Hill & Smith Holdings PLC (LON:HILS) trades with a trailing P/E of 21.8x, which is higher than the industry average of 13x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. 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 Hill & Smith Holdings
Breaking down 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 dollar of the company’s earnings.
P/E Calculation for HILS
Price-Earnings Ratio = Price per share ÷ Earnings per share
HILS Price-Earnings Ratio = £14.92 ÷ £0.686 = 21.8x
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 HILS, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since HILS’s P/E of 21.8x is higher than its industry peers (13x), it means that investors are paying more than they should for each dollar of HILS’s earnings. As such, our analysis shows that HILS represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that HILS should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to HILS, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with HILS, 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 HILS to are fairly valued by the market. If this does not hold, there is a possibility that HILS’s P/E is lower because our peer group is overvalued by the market.
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 rebalance your portfolio and reduce your holdings in HILS. 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 HILS’s future growth? Take a look at our free research report of analyst consensus for HILS’s outlook.
Past Track Record: Has HILS 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 HILS’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.
