Yahoo Finance Should You Be Tempted To Sell KCOM Group PLC (LON:KCOM) At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in KCOM Group PLC (LON:KCOM).
KCOM Group PLC (LON:KCOM) trades with a trailing P/E of 18.9x, which is higher than the industry average of 18.2x. While KCOM might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for KCOM Group
Breaking down the Price-Earnings 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 KCOM
Price-Earnings Ratio = Price per share ÷ Earnings per share
KCOM Price-Earnings Ratio = £1.02 ÷ £0.0538 = 18.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 KCOM, 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. Since KCOM’s P/E of 18.9x is higher than its industry peers (18.2x), it means that investors are paying more than they should for each dollar of KCOM’s earnings. Therefore, according to this analysis, KCOM is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that KCOM 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 KCOM, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with KCOM, 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 KCOM to are fairly valued by the market. If this is violated, KCOM’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 overvaluation could signal a potential selling opportunity to reduce your exposure to KCOM. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for KCOM’s future growth? Take a look at our free research report of analyst consensus for KCOM’s outlook.
Past Track Record: Has KCOM 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 KCOM’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.
