Yahoo Finance Does Just Energy Group Inc’s (TSE:JE) PE 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.
Just Energy Group Inc (TSE:JE) is trading with a trailing P/E of 1.7x, which is lower than the industry average of 17.7x. While JE 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 explain what the P/E ratio is as well as what you should look out for when using it.
Check out our latest analysis for Just Energy Group
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 JE
Price-Earnings Ratio = Price per share ÷ Earnings per share
JE Price-Earnings Ratio = CA$4.18 ÷ CA$2.412 = 1.7x
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 JE, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 1.7, JE’s P/E is lower than its industry peers (17.7). This implies that investors are undervaluing each dollar of JE’s earnings. Since the Integrated Utilities sector in CA is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Canadian Utilities, ATCO and Algonquin Power & Utilities. You can think of it like this: the market is suggesting that JE is a weaker business than the average comparable company.
Assumptions to watch out for
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to JE, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with JE, 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 JE to are fairly valued by the market. If this does not hold, there is a possibility that JE’s P/E is lower because our peer group is 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 JE 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for JE’s future growth? Take a look at our free research report of analyst consensus for JE’s outlook.
Past Track Record: Has JE 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 JE’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.
