Is It Time To Buy Bengal Energy Ltd (TSE:BNG) Based Off Its PE Ratio?
Bengal Energy Ltd (TSX:BNG) is currently trading at a trailing P/E of 5.4x, which is lower than the industry average of 15.2x. While this makes BNG 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 Bengal Energy
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 BNG
Price-Earnings Ratio = Price per share ÷ Earnings per share
BNG Price-Earnings Ratio = CA$0.12 ÷ CA$0.021 = 5.4x
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 BNG, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. BNG’s P/E of 5.4x is lower than its industry peers (15.2x), which implies that each dollar of BNG’s earnings is being undervalued by investors. Therefore, according to this analysis, BNG is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy BNG immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BNG. 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 BNG, 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 BNG to are fairly valued by the market. If this does not hold true, BNG’s lower P/E ratio may be because firms in our peer group are 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.
