Yahoo Finance Is It Time To Sell BCA Marketplace plc (LON:BCA) Based Off Its PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in BCA Marketplace plc (LON:BCA).
BCA Marketplace plc (LON:BCA) is currently trading at a trailing P/E of 40x, which is higher than the industry average of 12.2x. While BCA 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for BCA Marketplace
What you need to know about the P/E ratio
P/E is a popular ratio used for 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 BCA
Price-Earnings Ratio = Price per share ÷ Earnings per share
BCA Price-Earnings Ratio = £2.19 ÷ £0.0546 = 40x
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 BCA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. BCA’s P/E of 40x is higher than its industry peers (12.2x), which implies that each dollar of BCA’s earnings is being overvalued by investors. Therefore, according to this analysis, BCA is an over-priced stock.
A few caveats
Before you jump to the conclusion that BCA 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 BCA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BCA, 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 BCA to are fairly valued by the market. If this does not hold true, BCA’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 BCA. 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 BCA’s future growth? Take a look at our free research report of analyst consensus for BCA’s outlook.
Past Track Record: Has BCA 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 BCA’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.
