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 ThreeD Capital Inc (CNSX:IDK).
ThreeD Capital Inc (CNSX:IDK) trades with a trailing P/E of 2.1x, which is lower than the industry average of 12.4x. While IDK 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for ThreeD Capital
What you need to know about 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for IDK
Price per share = CA$0.14
Earnings per share = CA$0.0656
∴ Price-Earnings Ratio = CA$0.14 ÷ CA$0.0656 = 2.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to IDK, such as company lifetime and products sold. 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.
IDK’s P/E of 2.1x is lower than its industry peers (12.4x), which implies that each dollar of IDK’s earnings is being undervalued by investors. As such, our analysis shows that IDK represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy IDK, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to IDK. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you accidentally compared higher growth firms with IDK, then IDK’s P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. Alternatively, if you inadvertently compared less risky firms with IDK, IDK’s P/E would again be lower since investors would reward its peers’ lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing IDK to are fairly valued by the market. If this assumption does not hold true, IDK’s lower P/E ratio may be because firms in our peer group are being 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 IDK 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:
- Financial Health: Is IDK’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 IDK 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 IDK’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.