This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Safety Insurance Group Inc (NASDAQ:SAFT).
Safety Insurance Group Inc (NASDAQ:SAFT) is trading with a trailing P/E of 22.4x, which is higher than the industry average of 14.3x. While SAFT 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Safety Insurance Group
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for relative valuation. 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 SAFT
Price-Earnings Ratio = Price per share ÷ Earnings per share
SAFT Price-Earnings Ratio = $88.25 ÷ $3.934 = 22.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SAFT, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since SAFT’s P/E of 22.4x is higher than its industry peers (14.3x), it means that investors are paying more than they should for each dollar of SAFT’s earnings. As such, our analysis shows that SAFT represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your SAFT shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to SAFT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with SAFT, 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 SAFT to are fairly valued by the market. If this does not hold, there is a possibility that SAFT’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on SAFT, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for SAFT’s future growth? Take a look at our free research report of analyst consensus for SAFT’s outlook.
- Past Track Record: Has SAFT been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SAFT’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.