Is PCF Group plc (LON:PCF) A Sell At Its Current PE Ratio?
PCF Group plc (AIM:PCF) trades with a trailing P/E of 18.1x, which is higher than the industry average of 13.7x. While this makes PCF appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for PCF Group
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 pound of the company’s earnings.
P/E Calculation for PCF
Price-Earnings Ratio = Price per share ÷ Earnings per share
PCF Price-Earnings Ratio = £0.27 ÷ £0.015 = 18.1x
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 PCF, 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. At 18.1x, PCF’s P/E is higher than its industry peers (13.7x). This implies that investors are overvaluing each dollar of PCF’s earnings. Therefore, according to this analysis, PCF is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your PCF 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 PCF. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PCF, 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 PCF to are fairly valued by the market. If this is violated, PCF’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.
