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Sabra Health Care REIT Inc (NASDAQ:SBRA) trades with a trailing P/E of 19.1x, which is lower than the industry average of 22.7x. While this makes SBRA appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Sabra Health Care REIT
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 SBRA
Price-Earnings Ratio = Price per share ÷ Earnings per share
SBRA Price-Earnings Ratio = $16.66 ÷ $0.873 = 19.1x
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 SBRA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 19.1x, SBRA’s P/E is lower than its industry peers (22.7x). This implies that investors are undervaluing each dollar of SBRA’s earnings. As such, our analysis shows that SBRA represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that SBRA is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to SBRA, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with SBRA, 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 SBRA to are fairly valued by the market. If this does not hold true, SBRA’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.