Is Westshore Terminals Investment Corporation’s (TSE:WTE) PE Ratio A Signal To Buy For Investors?
Westshore Terminals Investment Corporation (TSX:WTE) is currently trading at a trailing P/E of 15.5x, which is lower than the industry average of 20.8x. While WTE 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Westshore Terminals Investment
What you need to know about 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 WTE
Price-Earnings Ratio = Price per share ÷ Earnings per share
WTE Price-Earnings Ratio = CA$24.58 ÷ CA$1.589 = 15.5x
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 WTE, 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. WTE’s P/E of 15.5x is lower than its industry peers (20.8x), which implies that each dollar of WTE’s earnings is being undervalued by investors. As such, our analysis shows that WTE represents an under-priced stock.
A few caveats
Before you jump to the conclusion that WTE is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to WTE, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with WTE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing WTE to are fairly valued by the market. If this does not hold true, WTE’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.
