Should You Buy Niko Resources Ltd (TSX:NKO) At This PE Ratio?
Niko Resources Ltd (TSX:NKO) is currently trading at a trailing P/E of 0x, which is lower than the industry average of 22x. While NKO 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. Today, 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 Niko Resources
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 NKO
Price-Earnings Ratio = Price per share ÷ Earnings per share
NKO Price-Earnings Ratio = 0.06 ÷ 2.691 = 0x
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 NKO, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. NKO’s P/E of 0x is lower than its industry peers (22x), which implies that each dollar of NKO’s earnings is being undervalued by investors. Therefore, according to this analysis, NKO is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that NKO 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 NKO. 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 NKO, 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 NKO to are fairly valued by the market. If this does not hold true, NKO’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? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to NKO. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.
Are you a potential investor? If you are considering investing in NKO, 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 Niko Resources 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.
