SGU’s current PE is a low 11.67x based on past earnings, which is around 161.11853557575006 of the Gas Utilities’s average of 18.81x. But should the relatively competitive multiple be the final verdict of SGU’s undervaluation? No. This is because multiples like PE tend to overlook key company-specific factors such as future growth and capital structure. To resolve this problem, I’ll identify some important factors to consider when judging the relative valuation of SGU. Let’s dive in.
Is SGU making any money?
The PE multiple is useful for when a company is profitable, which is the case with SGU. This is because the multiple is not applicable to companies that are not generating positive earnings. In this case, investors can use other useful tools like price-to-sales or price-to-book where appropriate. Previously, SGU has always produced a positive bottom line. This means investors can draw some insight from using the PE ratio, but let’s see if there is a better alternative.
Does SGU owe a lot of money?
With a debt-to-equity ratio of 50.74%, SGU’s debt structure can be improved by reducing the ratio to below 40%. This ratio indicates that for every $1 you invest, the company owes $0.51 to debtors. This can be risky, given that in the event of bankruptcy, these debtors receive the first claim on the assets of the company. Debt levels matter when valuing the business because in theory SGU’s share price represents the equity portion only, but its important to account for debt, as debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. The EV/EBITDA multiple, which uses EV as a substitute for share price, allows us to incorporate debt into our valuation.
SGU’s EV/EBITDA = US$661.40m / US$0 = 6.94x
Will SGU experience high growth?
Earnings are forecasted to grow at 0.71% annually for the next 5 years, which typically isn’t desirable growth for a small-cap stock but still reinforces a steady increase in earnings. This means that using trailing EBITDA is still sensible for our multiple as the bottom line isn’t expected to change drastically moving forward. In scenarios where there isn’t stability, using analyst’s forward estimate of EBITDA is recommended. For SGU, this results in a similar multiple of 6.94x.
Looking at relative valuation alone does not give you a complete picture of an investment. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
- Past Track Record: Has 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 ‘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.