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 Winston Resources Inc (CNSX:WRW).
Winston Resources Inc (CNSX:WRW) is trading with a trailing P/E of 0.6x, which is lower than the industry average of 11.2x. While WRW 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Winston Resources
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 dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for WRW
Price per share = CA$0.14
Earnings per share = CA$0.243
∴ Price-Earnings Ratio = CA$0.14 ÷ CA$0.243 = 0.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as WRW, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
At 0.6x, WRW’s P/E is lower than its industry peers (11.2x). This implies that investors are undervaluing each dollar of WRW’s earnings. Therefore, according to this analysis, WRW is an under-priced stock.
A few caveats
While our conclusion might prompt you to buy WRW immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to WRW. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with WRW, then investors would naturally value WRW at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with WRW, investors would also value WRW at a lower price since it is a lower growth investment. Both scenarios would explain why WRW has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing WRW to are fairly valued by the market. If this does not hold, there is a possibility that WRW’s P/E is lower 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 WRW 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for WRW’s future growth? Take a look at our free research report of analyst consensus for WRW’s outlook.
- Past Track Record: Has WRW 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 WRW’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.