I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Redde plc (LON:REDD).
Redde plc (LON:REDD) is currently trading at a trailing P/E of 18.2x, which is higher than the industry average of 16.4x. While REDD 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. Today, 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 Redde
Breaking down the Price-Earnings 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.
P/E Calculation for REDD
Price-Earnings Ratio = Price per share ÷ Earnings per share
REDD Price-Earnings Ratio = £1.82 ÷ £0.100 = 18.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to REDD, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since REDD’s P/E of 18.2x is higher than its industry peers (16.4x), it means that investors are paying more than they should for each dollar of REDD’s earnings. Therefore, according to this analysis, REDD is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your REDD shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to REDD, or else the difference in P/E might be a result of other factors. For example, if you are comparing…
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