In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
System1 Group PLC (LON:SYS1) trades on a trailing P/E of 20. This isn’t too far from the industry average (which is 20.9). While SYS1 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 explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for System1 Group
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 SYS1
Price-Earnings Ratio = Price per share ÷ Earnings per share
SYS1 Price-Earnings Ratio = £1.98 ÷ £0.0989 = 20x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SYS1, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. System1 Group PLC (LON:SYS1) is currently trading at a trailing P/E of 20, which is close to the industry average of 20.9. This multiple is a median of profitable companies of 24 Media companies in GB including NAHL Group, SpaceandPeople and Catalyst Media Group. One could put it like this: the market is pricing SYS1 as if it is roughly average for its industry.
A few caveats
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SYS1, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with SYS1, 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 SYS1 to are fairly valued by the market. If this does not hold, there is a possibility that SYS1’s P/E is lower because our peer group is 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 undervaluation could signal a good buying opportunity to increase your exposure to SYS1. 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: