At $0.055, Is Planet Ventures Inc (TSXV:PXI) A Buy?
Planet Ventures Inc (TSXV:PXI) is trading with a trailing P/E of 1.7x, which is lower than the industry average of 15x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Planet Ventures
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 PXI
Price-Earnings Ratio = Price per share ÷ Earnings per share
PXI Price-Earnings Ratio = 0.06 ÷ 0.032 = 1.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 PXI, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PXI's P/E of 1.7x is lower than its industry peers (15x), it means that investors are paying less than they should for each dollar of PXI's earnings. As such, our analysis shows that PXI represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy PXI, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PXI. 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 PXI, 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 PXI to are fairly valued by the market. If this does not hold, there is a possibility that PXI’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 PXI, 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 you are considering investing in PXI, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Planet Ventures 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.
