One simple valuation metrics I like to use : P/B, as it gives us the sustainable ROE discounted by the market Using the formula P/B = (ROE-g) / (COE-g).
I mention it here because it may be useful for companies which have rather stable ROE. Which is the case of Nick Scali. In their case, P/B = 6 x based on market cap/equities at 30/6/22. Using the formula above, we get that this level of P/B discounts a sustainable ROE of 32 % (using COE= 7 % and g=2 %). That's interesting because we can compare it with the historical ROE of around 50 %. So, it tells us that, at today's share price (10.42 $), the market already discounts a large deterioration of their ROE.
Of course, this is just the start of the discussion. After we have to assess if there is any obvious reasons why ROE could decrease like that. We can also play with the other inputs : - COE may be higher, depending on long term interest rates and equity risk premium, - also interesting to use a no growth scenario and see the conclusion (here discounted sustainable ROE = 42 % if COE = 7 % and g = 0 %).
