Knight-Swift Transportation Holdings Inc (NYSE:KNX) is currently trading at a trailing P/E of 10.9x, which is lower than the industry average of 14.3x. 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 Knight-Swift Transportation Holdings
Breaking down the P/E 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 dollar of the company’s earnings.
P/E Calculation for KNX
Price-Earnings Ratio = Price per share ÷ Earnings per share
KNX Price-Earnings Ratio = $47.83 ÷ $4.377 = 10.9x
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 KNX, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since KNX’s P/E of 10.9x is lower than its industry peers (14.3x), it means that investors are paying less than they should for each dollar of KNX’s earnings. As such, our analysis shows that KNX represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy KNX immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to KNX. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with KNX, 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 KNX to are fairly valued by the market. If this does not hold true, KNX’s lower P/E ratio may be because firms in our peer group are 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.