Is It Time To Buy Investec plc (LON:INVP) Based Off Its PE Ratio?
Investec plc (LSE:INVP) is trading with a trailing P/E of 11.3x, which is lower than the industry average of 17.7x. While INVP might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 Investec
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief 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 pound of the company’s earnings.
P/E Calculation for INVP
Price-Earnings Ratio = Price per share ÷ Earnings per share
INVP Price-Earnings Ratio = £6.15 ÷ £0.546 = 11.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as INVP, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 11.3x, INVP’s P/E is lower than its industry peers (17.7x). This implies that investors are undervaluing each dollar of INVP’s earnings. As such, our analysis shows that INVP represents an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that INVP is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to INVP. 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 INVP, 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 INVP to are fairly valued by the market. If this does not hold, there is a possibility that INVP’s P/E is lower because our peer group is 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.
