At £0.58125, Is Inland Homes PLC (AIM:INL) A Buy?
Inland Homes PLC (AIM:INL) trades with a trailing P/E of 9.9x, which is lower than the industry average of 11.8x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Inland Homes
What you need to know about the P/E ratio
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 INL
Price-Earnings Ratio = Price per share ÷ Earnings per share
INL Price-Earnings Ratio = 0.58 ÷ 0.059 = 9.9x
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 INL, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. INL’s P/E of 9.9x is lower than its industry peers (11.8x), which implies that each dollar of INL’s earnings is being undervalued by investors. Therefore, according to this analysis, INL is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy INL immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to INL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with INL, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing INL to are fairly valued by the market. If this is violated, INL'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 add more of INL to your portfolio. 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 INL 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 Inland Homes 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.
