The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Nevada Gold & Casinos Inc (NYSEMKT:UWN).
Nevada Gold & Casinos Inc (NYSEMKT:UWN) is trading with a trailing P/E of 16.9x, which is lower than the industry average of 23.1x. While this makes UWN appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Nevada Gold & Casinos
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 UWN
Price-Earnings Ratio = Price per share ÷ Earnings per share
UWN Price-Earnings Ratio = $2.12 ÷ $0.125 = 16.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 UWN, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since UWN’s P/E of 16.9x is lower than its industry peers (23.1x), it means that investors are paying less than they should for each dollar of UWN’s earnings. Therefore, according to this analysis, UWN is an under-priced stock.
A few caveats
However, before you rush out to buy UWN, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to UWN. 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 UWN, 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 UWN to are fairly valued by the market. If this does not hold true, UWN’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 UWN 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for UWN’s future growth? Take a look at our free research report of analyst consensus for UWN’s outlook.
- Past Track Record: Has UWN 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 UWN’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 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.