Should You Be Tempted To Buy Chorus Aviation Inc (TSE:CHR) At Its Current PE Ratio?
Chorus Aviation Inc (TSX:CHR) is currently trading at a trailing P/E of 6x, which is lower than the industry average of 6.2x. While this makes CHR 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Chorus Aviation
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. 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 CHR
Price-Earnings Ratio = Price per share ÷ Earnings per share
CHR Price-Earnings Ratio = CA$8.14 ÷ CA$1.349 = 6x
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 CHR, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 6x, CHR’s P/E is lower than its industry peers (6.2x). This implies that investors are undervaluing each dollar of CHR’s earnings. As such, our analysis shows that CHR represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy CHR immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CHR, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CHR, 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 CHR to are fairly valued by the market. If this does not hold, there is a possibility that CHR’s P/E is lower because our peer group is 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.
