Does Bayshore Petroleum Corp’s (CVE:BSH) PE Ratio Warrant A Buy?
Bayshore Petroleum Corp (TSXV:BSH) is currently trading at a trailing P/E of 0.7x, which is lower than the industry average of 14.4x. While this makes BSH 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 Bayshore Petroleum
What you need to know about the P/E ratio
P/E is a popular ratio used for relative valuation. 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 BSH
Price-Earnings Ratio = Price per share ÷ Earnings per share
BSH Price-Earnings Ratio = CA$0.02 ÷ CA$0.027 = 0.7x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BSH, 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. BSH’s P/E of 0.7x is lower than its industry peers (14.4x), which implies that each dollar of BSH’s earnings is being undervalued by investors. Therefore, according to this analysis, BSH is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy BSH immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BSH. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with BSH, 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 BSH to are fairly valued by the market. If this is violated, BSH’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.
