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Is Simonds Group Limited (ASX:SIO) Attractive At Its Current PE Ratio?

Erna Eldridge

I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Simonds Group Limited (ASX:SIO) is currently trading at a trailing P/E of 12.4, which is close to the industry average of 12. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. 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 Simonds Group

Demystifying the P/E ratio

ASX:SIO PE PEG Gauge September 19th 18

P/E is a popular ratio used for relative valuation. 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 SIO

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

SIO Price-Earnings Ratio = A$0.41 ÷ A$0.0331 = 12.4x

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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SIO, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Simonds Group Limited (ASX:SIO) is trading with a trailing P/E of 12.4, which is close to the industry average of 12. This multiple is a median of profitable companies of 8 Consumer Durables companies in AU including Shriro Holdings, Quantum Energy and Gale Pacific. You can think of it like this: the market is suggesting that SIO has similar prospects to its peers in the same industry.

Assumptions to watch out for

However, you should be aware that this analysis makes certain assumptions. Firstly, that our peer group contains companies that are similar to SIO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if Simonds Group Limited is growing faster than its peers, then it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to SIO may not be fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be undervalued.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in SIO. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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:

  1. Financial Health: Are SIO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has SIO 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 SIO’s historicals for more clarity.
  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.