This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Mortgage Choice Limited (ASX:MOC).
Mortgage Choice Limited (ASX:MOC) is trading with a trailing P/E of 8x, which is lower than the industry average of 18.4x. 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Mortgage Choice
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 MOC
Price-Earnings Ratio = Price per share ÷ Earnings per share
MOC Price-Earnings Ratio = A$1.43 ÷ A$0.178 = 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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as MOC, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. MOC’s P/E of 8x is lower than its industry peers (18.4x), which implies that each dollar of MOC’s earnings is being undervalued by investors. Therefore, according to this analysis, MOC is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy MOC, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to MOC. 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 MOC, 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 MOC to are fairly valued by the market. If this does not hold, there is a possibility that MOC’s P/E is lower because our peer group is overvalued by the market.
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 MOC. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for MOC’s future growth? Take a look at our free research report of analyst consensus for MOC’s outlook.
- Past Track Record: Has MOC 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 MOC’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.