Yahoo Finance Does Gamehost Inc’s (TSE:GH) P/E Ratio Signal A Buying Opportunity?
I am writing today to help inform people who are new to the stock market and want to learn about the link between company’s fundamentals and stock market performance.
Gamehost Inc (TSE:GH) is trading with a trailing P/E of 14x, which is lower than the industry average of 17x. While GH 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 break down what the P/E ratio is, how to interpret it and what to watch out for.
Check out our latest analysis for Gamehost
What you need to know about 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 GH
Price-Earnings Ratio = Price per share ÷ Earnings per share
GH Price-Earnings Ratio = CA$10.2 ÷ CA$0.730 = 14x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GH, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. GH’s P/E of 14 is lower than its industry peers (17), which implies that each dollar of GH’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 12 Hospitality companies in CA including Transat A.T, Evergreen Gaming and Pizza Pizza Royalty. One could put it like this: the market is pricing GH as if it is a weaker company than the average company in its industry.
A few caveats
Before you jump to conclusions it is important to realise that our assumptions rests on two assertions. The first is that our “similar companies” are actually similar to GH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with GH, 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 GH to are fairly valued by the market. If this does not hold true, GH’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 add more of GH to your portfolio. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for GH’s future growth? Take a look at our free research report of analyst consensus for GH’s outlook.
Past Track Record: Has GH 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 GH’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.