Yahoo Finance Should You Be Tempted To Buy Lucara Diamond Corp (TSE:LUC) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Lucara Diamond Corp (TSE:LUC)’s fundamentals and stock market performance.
Lucara Diamond Corp (TSE:LUC) is currently trading at a trailing P/E of 10.1x, which is lower than the industry average of 11x. While this makes LUC appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Lucara Diamond
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 LUC
Price-Earnings Ratio = Price per share ÷ Earnings per share
LUC Price-Earnings Ratio = $1.57 ÷ $0.156 = 10.1x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LUC, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. LUC’s P/E of 10.1x is lower than its industry peers (11x), which implies that each dollar of LUC’s earnings is being undervalued by investors. Therefore, according to this analysis, LUC is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy LUC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to LUC. 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 LUC, 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 LUC to are fairly valued by the market. If this does not hold, there is a possibility that LUC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on LUC, 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 LUC’s future growth? Take a look at our free research report of analyst consensus for LUC’s outlook.
Past Track Record: Has LUC 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 LUC’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.