When Should You Buy NAHL Group plc (AIM:NAH)?
NAHL Group plc (AIM:NAH) is trading with a trailing P/E of 6.7x, which is lower than the industry average of 23.5x. 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. View our latest analysis for NAHL Group
What you need to know about 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 pound of the company’s earnings.
P/E Calculation for NAH
Price-Earnings Ratio = Price per share ÷ Earnings per share
NAH Price-Earnings Ratio = 1.52 ÷ 0.228 = 6.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to NAH, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 6.7x, NAH’s P/E is lower than its industry peers (23.5x). This implies that investors are undervaluing each dollar of NAH’s earnings. Therefore, according to this analysis, NAH is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy NAH, 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 NAH, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with NAH, 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 NAH to are fairly valued by the market. If this does not hold true, NAH’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? Since you may have already conducted your due diligence on NAH, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I've outlined above.
Are you a potential investor? If you are considering investing in NAH, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 NAHL Group 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.
