When Should You Buy Data#3 Limited (ASX:DTL)?
Data#3 Limited (ASX:DTL) is currently trading at a trailing P/E of 16.8x, which is lower than the industry average of 23.3x. While DTL might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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 Data#3
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 DTL
Price-Earnings Ratio = Price per share ÷ Earnings per share
DTL Price-Earnings Ratio = 1.68 ÷ 0.1 = 16.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to DTL, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 16.8x, DTL’s P/E is lower than its industry peers (23.3x). This implies that investors are undervaluing each dollar of DTL’s earnings. Therefore, according to this analysis, DTL is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy DTL, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to DTL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with DTL, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing DTL to are fairly valued by the market. If this does not hold true, DTL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 DTL 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 you are considering investing in DTL, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 Data#3 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.
