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# Does Brinker International Inc’s (NYSE:EAT) PE Ratio Signal A Buying Opportunity?

Brinker International Inc (NYSE:EAT) trades with a trailing P/E of 18.4x, which is lower than the industry average of 23x. While EAT 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

### Breaking down the P/E ratio

A common ratio used for relative valuation is the P/E ratio. 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 EAT

Price-Earnings Ratio = Price per share ÷ Earnings per share

EAT Price-Earnings Ratio = \$51.61 ÷ \$2.808 = 18.4x

On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to EAT, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 18.4x, EAT’s P/E is lower than its industry peers (23x). This implies that investors are undervaluing each dollar of EAT’s earnings. Therefore, according to this analysis, EAT is an under-priced stock.

### A few caveats

While our conclusion might prompt you to buy EAT immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to EAT. 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 EAT, 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 EAT to are fairly valued by the market. If this is violated, EAT’s P/E may be lower than its peers as they are actually overvalued by investors.

### What this means for you:

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 EAT. 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. 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 highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for EAT’s future growth? Take a look at our free research report of analyst consensus for EAT’s outlook.
2. Past Track Record: Has EAT 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 EAT’s historicals for more clarity.
3. 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.