Does Fidessa group plc’s (LON:FDSA) PE Ratio Signal A Buying Opportunity?
Fidessa group plc (LSE:FDSA) is currently trading at a trailing P/E of 25.4x, which is lower than the industry average of 30.4x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Fidessa group
Breaking down 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 pound of the company’s earnings.
P/E Calculation for FDSA
Price-Earnings Ratio = Price per share ÷ Earnings per share
FDSA Price-Earnings Ratio = £25.62 ÷ £1.009 = 25.4x
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 FDSA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. FDSA’s P/E of 25.4x is lower than its industry peers (30.4x), which implies that each dollar of FDSA’s earnings is being undervalued by investors. Therefore, according to this analysis, FDSA is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy FDSA immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to FDSA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with FDSA, 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 FDSA to are fairly valued by the market. If this does not hold true, FDSA’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? Since you may have already conducted your due diligence on FDSA, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above.
Are you a potential investor? If FDSA has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Fidessa group 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.
