Yahoo Finance Is It Time To Buy Genus plc (LON:GNS) Based Off Its PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Genus plc (LON:GNS).
Genus plc (LON:GNS) trades with a trailing P/E of 22.9x, which is lower than the industry average of 24.5x. While this makes GNS appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Genus
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 GNS
Price-Earnings Ratio = Price per share ÷ Earnings per share
GNS Price-Earnings Ratio = £25.08 ÷ £1.094 = 22.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to GNS, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since GNS’s P/E of 22.9x is lower than its industry peers (24.5x), it means that investors are paying less than they should for each dollar of GNS’s earnings. As such, our analysis shows that GNS represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy GNS immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to GNS. 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 GNS, 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 GNS to are fairly valued by the market. If this does not hold true, GNS’s lower P/E ratio may be because firms in our peer group are 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 add more of GNS 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 GNS’s future growth? Take a look at our free research report of analyst consensus for GNS’s outlook.
Past Track Record: Has GNS 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 GNS’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.
