NI Holdings Inc (NASDAQ:NODK) is trading with a trailing P/E of 119.2x, which is higher than the industry average of 17.6x. While NODK might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for NI Holdings
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 dollar of the company’s earnings.
P/E Calculation for NODK
Price-Earnings Ratio = Price per share ÷ Earnings per share
NODK Price-Earnings Ratio = $17 ÷ $0.143 = 119.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 NODK, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 119.2x, NODK’s P/E is higher than its industry peers (17.6x). This implies that investors are overvaluing each dollar of NODK’s earnings. As such, our analysis shows that NODK represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your NODK shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NODK. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with NODK, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing NODK to are fairly valued by the market. If this does not hold, there is a possibility that NODK’s P/E is lower because our peer group is overvalued by the market.
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 NODK. 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 NODK, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
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 NI Holdings 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.