Yahoo Finance Should You Be Tempted To Buy Seven Generations Energy Ltd (TSE:VII) Because Of Its PE Ratio?
Seven Generations Energy Ltd (TSX:VII) trades with a trailing P/E of 14.7x, which is lower than the industry average of 20.1x. While this makes VII 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Seven Generations Energy
Breaking down the P/E ratio
P/E is a popular ratio used for 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 VII
Price-Earnings Ratio = Price per share ÷ Earnings per share
VII Price-Earnings Ratio = CA$15.35 ÷ CA$1.043 = 14.7x
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 VII, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. VII’s P/E of 14.7x is lower than its industry peers (20.1x), which implies that each dollar of VII’s earnings is being undervalued by investors. Therefore, according to this analysis, VII is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy VII, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to VII. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with VII, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing VII to are fairly valued by the market. If this does not hold, there is a possibility that VII’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 VII 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for VII’s future growth? Take a look at our free research report of analyst consensus for VII’s outlook.
Past Track Record: Has VII 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 VII’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.
