Should You Be Tempted To Buy Williams Grand Prix Holdings PLC (FRA:WGF1) Because Of Its PE Ratio?
Williams Grand Prix Holdings PLC (DB:WGF1) is currently trading at a trailing P/E of 10.6x, which is lower than the industry average of 16.6x. While this makes WGF1 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Williams Grand Prix Holdings
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 WGF1
Price-Earnings Ratio = Price per share ÷ Earnings per share
WGF1 Price-Earnings Ratio = £15.47 ÷ £1.457 = 10.6x
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 WGF1, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 10.6x, WGF1’s P/E is lower than its industry peers (16.6x). This implies that investors are undervaluing each dollar of WGF1’s earnings. As such, our analysis shows that WGF1 represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy WGF1 immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to WGF1. 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 WGF1, 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 WGF1 to are fairly valued by the market. If this does not hold true, WGF1’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 WGF1. 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:
Financial Health: Is WGF1’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has WGF1 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 WGF1’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.
