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Does Niko Resources Ltd’s (TSE:NKO) PE Ratio Signal A Buying Opportunity?

Niko Resources Ltd (TSX:NKO) is currently trading at a trailing P/E of 2.2x, which is lower than the industry average of 16.7x. While this makes NKO 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Niko Resources

Breaking down the Price-Earnings ratio

TSX:NKO PE PEG Gauge Jan 23rd 18
TSX:NKO PE PEG Gauge Jan 23rd 18

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 dollar of the company’s earnings.

P/E Calculation for NKO

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

NKO Price-Earnings Ratio = $0.1 ÷ $0.048 = 2.2x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to NKO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since NKO’s P/E of 2.2x is lower than its industry peers (16.7x), it means that investors are paying less than they should for each dollar of NKO’s earnings. Therefore, according to this analysis, NKO is an under-priced stock.

Assumptions to watch out for

Before you jump to the conclusion that NKO 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 NKO, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with NKO, 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 NKO to are fairly valued by the market. If this is violated, NKO’s P/E may be lower than its peers as they are actually overvalued by investors.


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.

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