Is It Time To Sell IHS Markit Ltd (NASDAQ:INFO) Based Off Its PE Ratio?
IHS Markit Ltd (NASDAQ:INFO) is currently trading at a trailing P/E of 46.1x, which is higher than the industry average of 21.4x. While INFO 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for IHS Markit
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 INFO
Price-Earnings Ratio = Price per share ÷ Earnings per share
INFO Price-Earnings Ratio = $48.03 ÷ $1.041 = 46.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to INFO, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. INFO’s P/E of 46.1x is higher than its industry peers (21.4x), which implies that each dollar of INFO’s earnings is being overvalued by investors. As such, our analysis shows that INFO represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your INFO shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to INFO. 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 INFO, 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 INFO to are fairly valued by the market. If this does not hold true, INFO’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.
