Live Ventures Incorporated (NASDAQ:LIVE) is trading with a trailing P/E of 3.4x, which is lower than the industry average of 16.8x. While LIVE 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. View our latest analysis for Live Ventures
Breaking down 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 LIVE
Price-Earnings Ratio = Price per share ÷ Earnings per share
LIVE Price-Earnings Ratio = 12 ÷ 3.493 = 3.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LIVE, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. LIVE’s P/E of 3.4x is lower than its industry peers (16.8x), which implies that each dollar of LIVE’s earnings is being undervalued by investors. As such, our analysis shows that LIVE represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy LIVE immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to LIVE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with LIVE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing LIVE to are fairly valued by the market. If this does not hold true, LIVE’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? 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 LIVE 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.
Are you a potential investor? If you are considering investing in LIVE, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.