Should You Buy CSG Systems International Inc (NASDAQ:CSGS) At This PE Ratio?
CSG Systems International Inc (NASDAQ:CSGS) is currently trading at a trailing P/E of 25x, which is lower than the industry average of 25x. 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. See our latest analysis for CSG Systems International
Breaking down the P/E ratio
P/E is a popular ratio used for 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 CSGS
Price-Earnings Ratio = Price per share ÷ Earnings per share
CSGS Price-Earnings Ratio = $47.24 ÷ $1.893 = 25x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CSGS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. CSGS’s P/E of 25x is lower than its industry peers (25x), which implies that each dollar of CSGS’s earnings is being undervalued by investors. Therefore, according to this analysis, CSGS is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that CSGS is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to CSGS. 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 CSGS, 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 CSGS to are fairly valued by the market. If this is violated, CSGS’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
