Is Global Brass and Copper Holdings Inc’s (NYSE:BRSS) PE Ratio A Signal To Buy For Investors?
Global Brass and Copper Holdings Inc (NYSE:BRSS) is trading with a trailing P/E of 14x, which is lower than the industry average of 23.4x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Global Brass and Copper Holdings
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 BRSS
Price-Earnings Ratio = Price per share ÷ Earnings per share
BRSS Price-Earnings Ratio = $31.65 ÷ $2.257 = 14x
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 BRSS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since BRSS’s P/E of 14x is lower than its industry peers (23.4x), it means that investors are paying less than they should for each dollar of BRSS’s earnings. Therefore, according to this analysis, BRSS is an under-priced stock.
A few caveats
Before you jump to the conclusion that BRSS is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to BRSS. 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 BRSS, 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 BRSS to are fairly valued by the market. If this does not hold true, BRSS’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 BRSS. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for BRSS’s future growth? Take a look at our free research report of analyst consensus for BRSS’s outlook.
Past Track Record: Has BRSS 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 BRSS’s historicals for more clarity.
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.
