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 Ten Entertainment Group plc (LON:TEG).
Ten Entertainment Group plc (LON:TEG) is currently trading at a trailing P/E of 33.4x, which is higher than the industry average of 19x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. 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 Ten Entertainment Group
Breaking down the Price-Earnings 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 TEG
Price-Earnings Ratio = Price per share ÷ Earnings per share
TEG Price-Earnings Ratio = £2.66 ÷ £0.0797 = 33.4x
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 TEG, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 33.4x, TEG’s P/E is higher than its industry peers (19x). This implies that investors are overvaluing each dollar of TEG’s earnings. Therefore, according to this analysis, TEG is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your TEG shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TEG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with TEG, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing TEG to are fairly valued by the market. If this does not hold true, TEG’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on TEG, 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for TEG’s future growth? Take a look at our free research report of analyst consensus for TEG’s outlook.
- Past Track Record: Has TEG 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 TEG’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.