Should You Be Tempted To Buy Steelcase Inc (NYSE:SCS) Because Of Its PE Ratio?
Steelcase Inc (NYSE:SCS) trades with a trailing P/E of 17.3x, which is lower than the industry average of 20x. 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Steelcase
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 SCS
Price-Earnings Ratio = Price per share ÷ Earnings per share
SCS Price-Earnings Ratio = $15.45 ÷ $0.891 = 17.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to SCS, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 17.3x, SCS’s P/E is lower than its industry peers (20x). This implies that investors are undervaluing each dollar of SCS’s earnings. Therefore, according to this analysis, SCS is an under-priced stock.
A few caveats
However, before you rush out to buy SCS, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SCS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with SCS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing SCS to are fairly valued by the market. If this does not hold, there is a possibility that SCS’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.
