At £0.26, Is Share Plc (AIM:SHRE) A Sell?
Share Plc (AIM:SHRE) is trading with a trailing P/E of 58.9x, which is higher than the industry average of 17x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Share
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 pound of the company’s earnings.
P/E Calculation for SHRE
Price-Earnings Ratio = Price per share ÷ Earnings per share
SHRE Price-Earnings Ratio = 0.26 ÷ 0.004 = 58.9x
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 SHRE, 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 SHRE's P/E of 58.9x is higher than its industry peers (17x), it means that investors are paying more than they should for each dollar of SHRE's earnings. Therefore, according to this analysis, SHRE is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your SHRE shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SHRE. 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 SHRE, 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 SHRE to are fairly valued by the market. If this is violated, SHRE's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in SHRE. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in SHRE, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 Share 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.
