Is IMF Bentham Limited (ASX:IMF) A Sell At Its Current PE Ratio?
IMF Bentham Limited (ASX:IMF) is currently trading at a trailing P/E of 36x, which is higher than the industry average of 26.6x. While IMF might seem like a stock to avoid or sell if you own it, 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 IMF Bentham
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 IMF
Price-Earnings Ratio = Price per share ÷ Earnings per share
IMF Price-Earnings Ratio = A$3.25 ÷ A$0.09 = 36x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 IMF, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since IMF’s P/E of 36x is higher than its industry peers (26.6x), it means that investors are paying more than they should for each dollar of IMF’s earnings. As such, our analysis shows that IMF represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your IMF shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to IMF. 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 IMF, 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 IMF to are fairly valued by the market. If this does not hold true, IMF’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.
