I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in United-Guardian Inc (NASDAQ:UG).
United-Guardian Inc (NASDAQ:UG) trades with a trailing P/E of 20x, which is lower than the industry average of 21.5x. While UG 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. 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 United-Guardian
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 UG
Price-Earnings Ratio = Price per share ÷ Earnings per share
UG Price-Earnings Ratio = $18.55 ÷ $0.929 = 20x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 UG, 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. At 20x, UG’s P/E is lower than its industry peers (21.5x). This implies that investors are undervaluing each dollar of UG’s earnings. Therefore, according to this analysis, UG is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy UG immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to UG, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with UG, 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 UG to are fairly valued by the market. If this does not hold true, UG’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
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 UG. 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. 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 UG’s future growth? Take a look at our free research report of analyst consensus for UG’s outlook.
- Past Track Record: Has UG 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 UG’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.