I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Boyd Gaming Corporation (NYSE:BYD) is trading with a trailing P/E of 16.1, which is close to the industry average of 16.1. While this makes BYD 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 explain what the P/E ratio is as well as what you should look out for when using it.
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 BYD
Price-Earnings Ratio = Price per share ÷ Earnings per share
BYD Price-Earnings Ratio = $24.41 ÷ $1.518 = 16.1x
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 BYD, 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. Boyd Gaming Corporation (NYSE:BYD) is currently trading at a trailing P/E of 16.1, which is close to the industry average of 16.1. This multiple is a median of profitable companies of 25 Hospitality companies in US including China Enterprises, Caesars Entertainment and Speedway Motorsports. One could put it like this: the market is pricing BYD as if it is roughly average for its industry.
Assumptions to be aware of
However, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BYD, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BYD, 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 BYD to are fairly valued by the market. If this does not hold true, BYD’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 BYD 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 BYD’s future growth? Take a look at our free research report of analyst consensus for BYD’s outlook.
- Past Track Record: Has BYD 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 BYD’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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.