Should You Be Tempted To Buy Fogo de Chão Inc (NASDAQ:FOGO) Because Of Its PE Ratio?

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 Fogo de Chão Inc (NASDAQ:FOGO).

Fogo de Chão Inc (NASDAQ:FOGO) is trading with a trailing P/E of 15.4x, which is lower than the industry average of 22.9x. While this makes FOGO appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Fogo de Chão

Breaking down the P/E ratio

NasdaqGS:FOGO PE PEG Gauge June 13th 18
NasdaqGS:FOGO PE PEG Gauge June 13th 18

The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for FOGO

Price per share = $15.75

Earnings per share = $1.02

∴ Price-Earnings Ratio = $15.75 ÷ $1.02 = 15.4x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to FOGO, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. 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.

FOGO’s P/E of 15.4x is lower than its industry peers (22.9x), which implies that each dollar of FOGO’s earnings is being undervalued by investors. As such, our analysis shows that FOGO represents an under-priced stock.

Assumptions to be aware of

However, before you rush out to buy FOGO, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to FOGO. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with FOGO, then investors would naturally value FOGO at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with FOGO, investors would also value FOGO at a lower price since it is a lower growth investment. Both scenarios would explain why FOGO has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing FOGO to are fairly valued by the market. If this assumption does not hold true, FOGO’s lower P/E ratio may be because firms in our peer group are being overvalued by the market.

NasdaqGS:FOGO Future Profit June 13th 18
NasdaqGS:FOGO Future Profit June 13th 18

What this means for you:

You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to FOGO. 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 FOGO’s future growth? Take a look at our free research report of analyst consensus for FOGO’s outlook.
  2. Past Track Record: Has FOGO 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 FOGO’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.