Is It Time To Buy Opiant Pharmaceuticals Inc (OPNT) Based Off Its PE Ratio?
Opiant Pharmaceuticals Inc (NASDAQ:OPNT) trades with a trailing P/E of 12.4x, which is lower than the industry average of 23.5x. While this makes OPNT 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. View our latest analysis for Opiant Pharmaceuticals
Demystifying the P/E 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 OPNT
Price-Earnings Ratio = Price per share ÷ Earnings per share
OPNT Price-Earnings Ratio = 36.11 ÷ 2.912 = 12.4x
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 OPNT, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. OPNT’s P/E of 12.4x is lower than its industry peers (23.5x), which implies that each dollar of OPNT’s earnings is being undervalued by investors. Therefore, according to this analysis, OPNT is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy OPNT immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to OPNT. 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 OPNT, 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 OPNT to are fairly valued by the market. If this does not hold, there is a possibility that OPNT’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 undervaluation could signal a good buying opportunity to increase your exposure to OPNT. 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 OPNT, 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 Opiant Pharmaceuticals 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.
