Is BlueScope Steel Limited’s (ASX:BSL) PE Ratio A Signal To Buy For Investors?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
BlueScope Steel Limited (ASX:BSL) is trading with a trailing P/E of 5.9x, which is lower than the industry average of 11.3x. While this makes BSL appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 BlueScope Steel
Demystifying 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 dollar of the company’s earnings.
P/E Calculation for BSL
Price-Earnings Ratio = Price per share ÷ Earnings per share
BSL Price-Earnings Ratio = A$16.99 ÷ A$2.865 = 5.9x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BSL, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since BSL’s P/E of 5.9 is lower than its industry peers (11.3), it means that investors are paying less for each dollar of BSL’s earnings. This multiple is a median of profitable companies of 24 Metals and Mining companies in AU including Gladiator Resources, Titan Minerals and Aeris Resources. You can think of it like this: the market is suggesting that BSL is a weaker business than the average comparable company.
Assumptions to be aware of
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to BSL, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BSL, 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 BSL to are fairly valued by the market. If this is violated, BSL’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
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 BSL 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. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BSL’s future growth? Take a look at our free research report of analyst consensus for BSL’s outlook.
Past Track Record: Has BSL 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 BSL’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 editorial-team@simplywallst.com.
