Does Ichor Holdings Ltd’s (NASDAQ:ICHR) PE Ratio Warrant A Buy?
Ichor Holdings Ltd (NASDAQ:ICHR) is trading with a trailing P/E of 14.7x, which is lower than the industry average of 23.6x. While ICHR 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Ichor Holdings
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 ICHR
Price-Earnings Ratio = Price per share ÷ Earnings per share
ICHR Price-Earnings Ratio = $28.5 ÷ $1.944 = 14.7x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ICHR, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since ICHR’s P/E of 14.7x is lower than its industry peers (23.6x), it means that investors are paying less than they should for each dollar of ICHR’s earnings. Therefore, according to this analysis, ICHR is an under-priced stock.
A few caveats
Before you jump to the conclusion that ICHR 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 ICHR, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with ICHR, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ICHR to are fairly valued by the market. If this does not hold true, ICHR’s lower P/E ratio may be because firms in our peer group are 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.
