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Successfully identifying value shares is fundamental to profitable investing. But where to start? Most analysts look at future cash flow forecasts to come up with a valuation in todayâs money. This is, however, very labour-intensive. And what if you havenât got the time to perform these sorts of calculations?
Fortunately, thereâs a relatively quick way to try and identify cheap shares. And Iâve used it to find one example of what I believe is a bargain-basement value stock.
A quick overview
As its name suggests, the price-to-earnings (P/E) ratio measures a companyâs share price relative to its profit. In simple terms, it defines how much investors are prepared to pay for £1 of earnings. In theory, the lower the number, the cheaper the shares.
However, itâs important to apply a bit of judgement when using the P/E ratio. A low figure could imply that investors are concerned about the companyâs prospects. For example, earnings might be going in the wrong direction. And ratios will vary across different industries. Capital-intensive sectors tend to have lower valuation multiples.
Out of fashion
But I think it makes sense to track a stockâs P/E ratio over time. And thatâs what makes me think that shares of JD Sports Fashion (LSE:JD.) offer tremendous value at the moment (9 April).
Based on forecast earnings per share (EPS) of 11.37p for the year ended 31 January 2026 (FY26), the stockâs trading on an extremely attractive 6.5 times earnings. The five-year average (median) is 15.1.
And if analystsâ forecasts prove to be accurate, the sports retailerâs forward P/E ratios are 6.5 (FY27) and 5.9 (FY28).
A challenging market
But remember what I said earlier about a low number being a possible warning sign? Well, it could apply here.
The groupâs been growing by buying new stores but its like-for-like (LFL) sales have been falling. During the 48 weeks to 3 January, they were down 2.1% compared to the same period a year earlier. The worst-performing region was the UK with a reported 4% drop.
Itâs estimated that Nikeâs products account for around half of JD Sportsâ sales. But the American sportswear giantâs been struggling lately. There are some early signs that it’s recovering but itâs still not out of the woods.
In addition, concerns have been raised that the British retailerâs core demographic of 18-to-24-year-olds are seeing their living standards affected by artificial intelligence solutions replacing entry-level jobs.
Not all bad
Despite these challenges, I still think the groupâs shares are in bargain territory.
Over 60% of the groupâs stores are now in North America, which are performing better than its European ones. Also, itâs not totally reliant on Nike. Other brands, Adidas being the most notable one, are doing very well at the moment. This yearâs football World Cup could also lift sales.
And JD Sports remains cash generative. With free cash flow of over £400m in FY26, it should have the scope to refresh some of its stores in an attempt to get its LFL sales growing again. The consensus of those analysts that have modelled the groupâs cash flow potential reckon the stockâs 26% undervalued.
Weighing everything up, I believe JD Sports is well worth considering by investors today.
The post A P/E ratio of less than 7. Is this a red-hot value share to consider now? appeared first on The Motley Fool UK.
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James Beard has positions in JD Sports Fashion. The Motley Fool UK has recommended London Stock Exchange Group Plc and Nike. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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