AIM:BZT PE PEG Gauge Nov 29th 17
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 pound of the company’s earnings.
P/E Calculation for BZT
Price-Earnings Ratio = Price per share ÷ Earnings per share
BZT Price-Earnings Ratio = £0.01 ÷ £0.02 = 0.5x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BZT, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since BZT’s P/E of 0.5x is lower than its industry peers (13.9x), it means that investors are paying less than they should for each dollar of BZT’s earnings. As such, our analysis shows that BZT represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy BZT, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to BZT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BZT, 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 BZT to are fairly valued by the market. If this does not hold, there is a possibility that BZT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? Since you may have already conducted your due diligence on BZT, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.
Are you a potential investor? If BZT 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.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Bezant Resources for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.