TSXV:TUO PE PEG Gauge Nov 8th 17
More The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 TUO
Price-Earnings Ratio = Price per share ÷ Earnings per share
TUO Price-Earnings Ratio = 0.17 ÷ 0.054 = 3.2x
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 TUO, 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. Since TUO’s P/E of 3.2x is lower than its industry peers (11.1x), it means that investors are paying less than they should for each dollar of TUO’s earnings. As such, our analysis shows that TUO represents an under-priced stock.
Assumptions to watch out for Before you jump to the conclusion that TUO is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to TUO. 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 TUO, 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 TUO to are fairly valued by the market. If this does not hold true, TUO’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? Since you may have already conducted your due diligence on TUO, 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 TUO 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 Teuton 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.