Yahoo Finance Is It Time To Buy Ingenta Plc (LON:ING) Based Off Its PE Ratio?
Ingenta Plc (AIM:ING) is currently trading at a trailing P/E of 20.6x, which is lower than the industry average of 27.1x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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. Check out our latest analysis for Ingenta
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 pound of the company’s earnings.
P/E Calculation for ING
Price-Earnings Ratio = Price per share ÷ Earnings per share
ING Price-Earnings Ratio = £1.2 ÷ £0.058 = 20.6x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ING, 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. ING’s P/E of 20.6x is lower than its industry peers (27.1x), which implies that each dollar of ING’s earnings is being undervalued by investors. Therefore, according to this analysis, ING is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy ING, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ING. 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 ING, 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 ING to are fairly valued by the market. If this does not hold true, ING’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 ING, 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:
Financial Health: Is ING’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.
Past Track Record: Has ING 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 ING’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.
