Yahoo Finance Is Diversified Royalty Corp’s (TSE:DIV) PE Ratio A Signal To Sell For Investors?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Diversified Royalty Corp (TSE:DIV)’s fundamentals and stock market performance.
Diversified Royalty Corp (TSE:DIV) trades with a trailing P/E of 29x, which is higher than the industry average of 18.3x. While DIV 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. View out our latest analysis for Diversified Royalty
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 DIV
Price-Earnings Ratio = Price per share ÷ Earnings per share
DIV Price-Earnings Ratio = CA$3.24 ÷ CA$0.112 = 29x
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 DIV, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. DIV’s P/E of 29x is higher than its industry peers (18.3x), which implies that each dollar of DIV’s earnings is being overvalued by investors. Therefore, according to this analysis, DIV is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your DIV shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to DIV, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with DIV, 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 DIV to are fairly valued by the market. If this is violated, DIV’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in DIV. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 DIV’s future growth? Take a look at our free research report of analyst consensus for DIV’s outlook.
Past Track Record: Has DIV 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 DIV’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.
