In This Article:
Supply Network Limited (ASX:SNL) trades with a trailing P/E of 16.8x, which is lower than the industry average of 23.5x. While SNL 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Supply Network
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 SNL
Price-Earnings Ratio = Price per share ÷ Earnings per share
SNL Price-Earnings Ratio = A$3.14 ÷ A$0.186 = 16.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SNL, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. SNL’s P/E of 16.8x is lower than its industry peers (23.5x), which implies that each dollar of SNL’s earnings is being undervalued by investors. Therefore, according to this analysis, SNL is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy SNL, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SNL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with SNL, 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 SNL to are fairly valued by the market. If this does not hold, there is a possibility that SNL’s P/E is lower because our peer group is 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.