Should You Be Tempted To Sell Ingenta Plc (AIM:ING) Because Of Its PE Ratio?
Ingenta Plc (AIM:ING) trades with a trailing P/E of 34.3x, which is higher than the industry average of 23x. While this makes ING appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Ingenta
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. 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 pound of the company’s earnings.
P/E Calculation for ING
Price-Earnings Ratio = Price per share ÷ Earnings per share
ING Price-Earnings Ratio = 1.59 ÷ 0.046 = 34.3x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 ING, 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 34.3x, ING’s P/E is higher than its industry peers (23x). This implies that investors are overvaluing each dollar of ING’s earnings. As such, our analysis shows that ING represents an over-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your ING shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ING, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ING, 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 ING to are fairly valued by the market. If this is violated, ING's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ING. 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.
Are you a potential investor? If you are considering investing in ING, basing your decision on the PE metric at one point in time is certainly not sufficient. I recommend you do additional analysis by looking at its intrinsic valuation and using other relative valuation ratios like PEG or EV/EBITDA.
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 Ingenta 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.
