Yahoo Finance Should You Be Tempted To Buy Peyto Exploration & Development Corp (TSE:PEY) At Its Current PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Peyto Exploration & Development Corp (TSE:PEY).
Peyto Exploration & Development Corp (TSE:PEY) trades with a trailing P/E of 9.2x, which is lower than the industry average of 20.2x. While PEY 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 Peyto Exploration & Development
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 PEY
Price-Earnings Ratio = Price per share ÷ Earnings per share
PEY Price-Earnings Ratio = CA$10.26 ÷ CA$1.116 = 9.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PEY, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PEY’s P/E of 9.2x is lower than its industry peers (20.2x), it means that investors are paying less than they should for each dollar of PEY’s earnings. Therefore, according to this analysis, PEY is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy PEY immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PEY, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with PEY, 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 PEY to are fairly valued by the market. If this does not hold true, PEY’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on PEY, 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 PEY’s future growth? Take a look at our free research report of analyst consensus for PEY’s outlook.
Past Track Record: Has PEY 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 PEY’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.
