Should You Buy Funko Inc (NASDAQ:FNKO) At This PE Ratio?
Funko Inc (NASDAQ:FNKO) trades with a trailing P/E of 0.1x, which is lower than the industry average of 16.6x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Funko
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 FNKO
Price-Earnings Ratio = Price per share ÷ Earnings per share
FNKO Price-Earnings Ratio = $7.69 ÷ $58.341 = 0.1x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FNKO, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since FNKO’s P/E of 0.1x is lower than its industry peers (16.6x), it means that investors are paying less than they should for each dollar of FNKO’s earnings. As such, our analysis shows that FNKO represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy FNKO immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FNKO, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FNKO, 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 FNKO to are fairly valued by the market. If this is violated, FNKO’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.
