This analysis is intended to introduce important early concepts to people who are starting to invest and want to learn about the link between company’s fundamentals and stock market performance.
Beasley Broadcast Group Inc (NASDAQ:BBGI) is currently trading at a trailing P/E of 2.4x, which is lower than the industry average of 9.9x. 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 explain what the P/E ratio is as well as what you should look out for when using it.
Breaking down the P/E ratio
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 BBGI
Price-Earnings Ratio = Price per share ÷ Earnings per share
BBGI Price-Earnings Ratio = $6.61 ÷ $2.806 = 2.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BBGI, 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. BBGI’s P/E of 2.4 is lower than its industry peers (9.9), which implies that each dollar of BBGI’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Media companies in US including Cumulus Media, Emmis Communications and Entravision Communications. You can think of it like this: the market is suggesting that BBGI is a weaker business than the average comparable company.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BBGI. 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 BBGI, 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 BBGI to are fairly valued by the market. If this is violated, BBGI’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to BBGI. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for BBGI’s future growth? Take a look at our free research report of analyst consensus for BBGI’s outlook.
- Past Track Record: Has BBGI been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BBGI’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.