Is Supply Network Limited (ASX:SNL) A Sell At Its Current PE Ratio?

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Supply Network Limited (ASX:SNL).

Supply Network Limited (ASX:SNL) is currently trading at a trailing P/E of 22.9x, which is higher than the industry average of 22.3x. While SNL might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 Supply Network

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.

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. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SNL, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use below. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

SNL’s P/E of 22.9x is higher than its industry peers (22.3x), which implies that each dollar of SNL’s earnings is being overvalued by investors. This multiple is a median of profitable companies of 3 stocks internationally, operating in the Retail Distributors industry. I’ve decided to use a global peer group as there’s not enough companies in AU that are considered as appropriate peers, and I wanted to get a broader perspective on the regional multiple. Some peers include Ruralco Holdings, Bapcor and National Tyre & Wheel. As such, our analysis shows that SNL represents an over-priced stock.

A few caveats

Before you jump to the conclusion that SNL should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to SNL. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared riskier firms with SNL, then investors would naturally value SNL at a higher price since it is a less risky investment. Similarly, if you accidentally compared lower growth firms with SNL, investors would also value SNL at a higher price since it is a higher growth investment. Both scenarios would explain why SNL has a higher P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing SNL to are fairly valued by the market. If this does not hold, there is a possibility that SNL’s P/E is higher because firms in our peer group are being undervalued by the market.

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to SNL. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:

1. Future Outlook: What are well-informed industry analysts predicting for SNL’s future growth? Take a look at our free research report of analyst consensus for SNL’s outlook.
2. Past Track Record: Has SNL 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 SNL's historicals for more clarity.
3. 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.