Yahoo Finance What Does Razor Energy Corp’s (CVE:RZE) PE Ratio Tell You?
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.
Razor Energy Corp (CVE:RZE) is trading with a trailing P/E of 18.3x, which is lower than the industry average of 21.8x. While this makes RZE appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.
See our latest analysis for Razor Energy
Demystifying the P/E ratio
P/E is a popular ratio used for 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 RZE
Price-Earnings Ratio = Price per share ÷ Earnings per share
RZE Price-Earnings Ratio = CA$2.9 ÷ CA$0.159 = 18.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as RZE, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. RZE’s P/E of 18.3x is lower than its industry peers (21.8x), which implies that each dollar of RZE’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Oil and Gas companies in CA including Pinedale Energy, McChip Resources and Greencastle Resources. Therefore, according to this analysis, RZE is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy RZE immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to RZE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with RZE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing RZE to are fairly valued by the market. If this does not hold true, RZE’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 RZE 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:
Financial Health: Are RZE’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Valuation: What is RZE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RZE is currently mispriced by the market.
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.
