Net 1 UEPS Technologies Inc (NASDAQ:UEPS) is trading with a trailing P/E of 10x, which is lower than the industry average of 28.5x. While UEPS 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 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 Net 1 UEPS Technologies
What you need to know about the P/E 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 UEPS
Price-Earnings Ratio = Price per share ÷ Earnings per share
UEPS Price-Earnings Ratio = $12.28 ÷ $1.225 = 10x
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 UEPS, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 10x, UEPS’s P/E is lower than its industry peers (28.5x). This implies that investors are undervaluing each dollar of UEPS’s earnings. Therefore, according to this analysis, UEPS is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy UEPS immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to UEPS, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with UEPS, 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 UEPS to are fairly valued by the market. If this is violated, UEPS’s P/E may be lower than its peers as they are actually overvalued by investors.
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 UEPS 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 UEPS has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.