Is It Time To Buy Coda Octopus Group Inc (CODA) Based Off Its PE Ratio?
Coda Octopus Group Inc (NASDAQ:CODA) is currently trading at a trailing P/E of 6.9x, which is lower than the industry average of 25.1x. While this makes CODA appear like a great stock to buy, 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 Coda Octopus Group
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 CODA
Price-Earnings Ratio = Price per share ÷ Earnings per share
CODA Price-Earnings Ratio = 4.05 ÷ 0.59 = 6.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CODA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since CODA's P/E of 6.9x is lower than its industry peers (25.1x), it means that investors are paying less than they should for each dollar of CODA's earnings. Therefore, according to this analysis, CODA is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy CODA immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CODA. 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 CODA, 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 CODA to are fairly valued by the market. If this does not hold true, CODA’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of CODA to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If CODA has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Coda Octopus Group 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.
