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 TEN
Price-Earnings Ratio = Price per share ÷ Earnings per share
TEN Price-Earnings Ratio = CA$0.09 ÷ CA$0.037 = 2.3x
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 TEN, 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 2.3x, TEN’s P/E is lower than its industry peers (10.9x). This implies that investors are undervaluing each dollar of TEN’s earnings. Therefore, according to this analysis, TEN is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that TEN is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TEN, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with TEN, 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 TEN to are fairly valued by the market. If this does not hold, there is a possibility that TEN’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.