In This Article:
Inghams Group Limited (ASX:ING) is trading with a trailing P/E of 20x, which is higher than the industry average of 11.2x. While this makes ING appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Inghams Group
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 ING
Price-Earnings Ratio = Price per share ÷ Earnings per share
ING Price-Earnings Ratio = A$3.39 ÷ A$0.169 = 20x
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 ING, 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. At 20x, ING’s P/E is higher than its industry peers (11.2x). This implies that investors are overvaluing each dollar of ING’s earnings. As such, our analysis shows that ING represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your ING shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ING. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with ING, 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 ING to are fairly valued by the market. If this is violated, ING’s P/E may be lower than its peers as they are actually overvalued by investors.
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.