Yahoo Finance Does Nautilus Inc’s (NYSE:NLS) PE Ratio Warrant A Buy?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Nautilus Inc (NYSE:NLS) is currently trading at a trailing P/E of 17.2x, which is lower than the industry average of 25.1x. While NLS 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 Nautilus
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for NLS
Price-Earnings Ratio = Price per share ÷ Earnings per share
NLS Price-Earnings Ratio = $14.7 ÷ $0.855 = 17.2x
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 NLS, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. NLS’s P/E of 17.2x is lower than its industry peers (25.1x), which implies that each dollar of NLS’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Leisure companies in US including Playmates Holdings, Escalade and MCBC Holdings. Therefore, according to this analysis, NLS is an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy NLS immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NLS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with NLS, 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 NLS to are fairly valued by the market. If this is violated, NLS’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on NLS, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 NLS’s future growth? Take a look at our free research report of analyst consensus for NLS’s outlook.
Past Track Record: Has NLS 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 NLS’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.
