Should You Be Tempted To Buy Harvey Norman Holdings Limited (ASX:HVN) At Its Current PE Ratio?
Harvey Norman Holdings Limited (ASX:HVN) trades with a trailing P/E of 9.4x, which is lower than the industry average of 17.1x. 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. 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 Harvey Norman Holdings
Breaking down the Price-Earnings 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 dollar of the company’s earnings.
P/E Calculation for HVN
Price-Earnings Ratio = Price per share ÷ Earnings per share
HVN Price-Earnings Ratio = A$3.38 ÷ A$0.359 = 9.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 HVN, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 9.4x, HVN’s P/E is lower than its industry peers (17.1x). This implies that investors are undervaluing each dollar of HVN’s earnings. Therefore, according to this analysis, HVN is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy HVN immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to HVN. 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 HVN, 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 HVN to are fairly valued by the market. If this is violated, HVN’s P/E may be lower than its peers as they are actually overvalued by investors.
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 HVN. 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 HVN’s future growth? Take a look at our free research report of analyst consensus for HVN’s outlook.
Past Track Record: Has HVN 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 HVN’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.
