Nautilus Inc (NYSE:NLS) is trading with a trailing P/E of 14.1x, which is lower than the industry average of 22.5x. While NLS might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Nautilus
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 NLS
Price-Earnings Ratio = Price per share ÷ Earnings per share
NLS Price-Earnings Ratio = $12.7 ÷ $0.901 = 14.1x
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 NLS, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since NLS’s P/E of 14.1x is lower than its industry peers (22.5x), it means that investors are paying less than they should for each dollar of NLS’s earnings. As such, our analysis shows that NLS represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy NLS, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to NLS. 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 NLS, 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 NLS to are fairly valued by the market. If this does not hold true, NLS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.