Should You Be Tempted To Buy Liberty Ventures (NASDAQ:LVNT.A) Because Of Its PE Ratio?
Liberty Ventures (NASDAQ:LVNT.A) is currently trading at a trailing P/E of 6.8x, which is lower than the industry average of 66.2x. While this makes LVNT.A appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 Liberty Ventures
Breaking down the Price-Earnings 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 LVNT.A
Price-Earnings Ratio = Price per share ÷ Earnings per share
LVNT.A Price-Earnings Ratio = $58.02 ÷ $8.57 = 6.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 LVNT.A, 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. Since LVNT.A’s P/E of 6.8x is lower than its industry peers (66.2x), it means that investors are paying less than they should for each dollar of LVNT.A’s earnings. As such, our analysis shows that LVNT.A represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy LVNT.A immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to LVNT.A, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with LVNT.A, 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 LVNT.A to are fairly valued by the market. If this does not hold true, LVNT.A’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of LVNT.A to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If LVNT.A has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Liberty Ventures for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
