International Speedway Corporation (NASDAQ:ISCA) trades with a trailing P/E of 17.2x, which is lower than the industry average of 21.3x. While ISCA 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. Check out our latest analysis for International Speedway
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 ISCA
Price-Earnings Ratio = Price per share ÷ Earnings per share
ISCA Price-Earnings Ratio = $42.65 ÷ $2.482 = 17.2x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ISCA, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since ISCA’s P/E of 17.2x is lower than its industry peers (21.3x), it means that investors are paying less than they should for each dollar of ISCA’s earnings. Therefore, according to this analysis, ISCA is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy ISCA, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to ISCA, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with ISCA, 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 ISCA to are fairly valued by the market. If this does not hold true, ISCA’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.