Does CSR Limited’s (ASX:CSR) PE Ratio Warrant A Buy?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
CSR Limited (ASX:CSR) trades with a trailing P/E of 11.4x, which is lower than the industry average of 20.5x. While CSR 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for CSR
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 CSR
Price-Earnings Ratio = Price per share ÷ Earnings per share
CSR Price-Earnings Ratio = A$4.27 ÷ A$0.375 = 11.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CSR, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since CSR’s P/E of 11.4 is lower than its industry peers (20.5), it means that investors are paying less for each dollar of CSR’s earnings. This multiple is a median of profitable companies of 5 Basic Materials companies in AU including Brickworks, Boral and Adelaide Brighton. One could put it like this: the market is pricing CSR as if it is a weaker company than the average company in its industry.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CSR. 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 CSR, 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 CSR to are fairly valued by the market. If this is violated, CSR’s P/E may be lower than its peers as they are actually overvalued by investors.
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 CSR 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CSR’s future growth? Take a look at our free research report of analyst consensus for CSR’s outlook.
Past Track Record: Has CSR 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 CSR’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.