Does Centrica plc’s (LON:CNA) PE Ratio Warrant A Sell?

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Centrica plc (LSE:CNA) trades with a trailing P/E of 23.6x, which is higher than the industry average of 19.4x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Centrica

Breaking down the Price-Earnings ratio

LSE:CNA PE PEG Gauge Mar 30th 18
LSE:CNA PE PEG Gauge Mar 30th 18

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 pound of the company’s earnings.

P/E Calculation for CNA

Price-Earnings Ratio = Price per share ÷ Earnings per share

CNA Price-Earnings Ratio = £1.42 ÷ £0.06 = 23.6x

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 CNA, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 23.6x, CNA’s P/E is higher than its industry peers (19.4x). This implies that investors are overvaluing each dollar of CNA’s earnings. Therefore, according to this analysis, CNA is an over-priced stock.

A few caveats

Before you jump to the conclusion that CNA 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 CNA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with CNA, 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 CNA to are fairly valued by the market. If this does not hold, there is a possibility that CNA’s P/E is lower because our peer group is 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.