Coda Octopus Group Inc (NASDAQ:CODA) trades with a trailing P/E of 10.9x, which is lower than the industry average of 23.8x. While CODA 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Coda Octopus Group
Demystifying 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. 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 CODA
Price-Earnings Ratio = Price per share ÷ Earnings per share
CODA Price-Earnings Ratio = $4.01 ÷ $0.367 = 10.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CODA, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 10.9x, CODA’s P/E is lower than its industry peers (23.8x). This implies that investors are undervaluing each dollar of CODA’s earnings. Therefore, according to this analysis, CODA is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that CODA is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to CODA, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CODA, 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 CODA to are fairly valued by the market. If this does not hold, there is a possibility that CODA’s P/E is lower because our peer group is overvalued by the market.
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.