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Should You Be Tempted To Buy Tate & Lyle plc (LON:TATE) At Its Current PE Ratio?

This article is intended for those of you who are at the beginning of your investing journey and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

Tate & Lyle plc (LON:TATE) is trading with a trailing P/E of 11.1x, which is lower than the industry average of 22.6x. While this makes TATE 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 Tate & Lyle

Demystifying the P/E ratio

LSE:TATE PE PEG Gauge October 14th 18

P/E is a popular ratio used for 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 TATE

Price-Earnings Ratio = Price per share ÷ Earnings per share

TATE Price-Earnings Ratio = £6.33 ÷ £0.569 = 11.1x

The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to TATE, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since TATE’s P/E of 11.1 is lower than its industry peers (22.6), it means that investors are paying less for each dollar of TATE’s earnings. This multiple is a median of profitable companies of 17 Food companies in GB including Dairy Crest Group, Anglo-Eastern Plantations and Wynnstay Group. You can think of it like this: the market is suggesting that TATE is a weaker business than the average comparable company.

A few caveats

However, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TATE. 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 TATE, 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 TATE to are fairly valued by the market. If this does not hold true, TATE’s lower P/E ratio may be because firms in our peer group are 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 TATE. 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:

  1. Future Outlook: What are well-informed industry analysts predicting for TATE’s future growth? Take a look at our free research report of analyst consensus for TATE’s outlook.
  2. Past Track Record: Has TATE 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 TATE’s historicals for more clarity.
  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.