Should You Be Tempted To Buy IWG PLC (LON:IWG) At Its Current PE Ratio?
IWG PLC (LSE:IWG) is trading with a trailing P/E of 19x, which is lower than the industry average of 19.6x. While this makes IWG 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for IWG
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 IWG
Price-Earnings Ratio = Price per share ÷ Earnings per share
IWG Price-Earnings Ratio = £2.37 ÷ £0.124 = 19x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as IWG, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since IWG’s P/E of 19x is lower than its industry peers (19.6x), it means that investors are paying less than they should for each dollar of IWG’s earnings. Therefore, according to this analysis, IWG is an under-priced stock.
A few caveats
However, before you rush out to buy IWG, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to IWG, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with IWG, 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 IWG to are fairly valued by the market. If this does not hold, there is a possibility that IWG’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.
