The Price-to-Earnings (PE) ratio is a popular metric for valuing established, profitable companies like Brookfield Infrastructure Partners because it directly relates a company’s share price to its current earnings. Investors often use the PE ratio to gauge how much they are paying for each dollar of company profit. This makes it especially useful for comparing companies within the same industry.

Growth expectations and risk play a major role in determining what counts as a “normal” or “fair” PE ratio. Companies expected to grow rapidly or seen as having less risk can justify higher PE ratios. Those facing headwinds or operating in riskier industries tend to trade at lower multiples.

Brookfield Infrastructure Partners currently trades at a PE ratio of 51.5x. This is well above the average PE of 18.6x for integrated utilities industry peers and also higher than the peer average of 22.7x. This premium might initially raise questions about overvaluation.

However, Simply Wall St’s proprietary “Fair Ratio” goes a step further by estimating what the multiple should be, given Brookfield’s specific growth profile, risk level, profit margins, industry, and market capitalization. For Brookfield, the Fair Ratio stands at 32.5x. This reflects a more nuanced assessment of its future prospects and unique qualities.

Unlike a simple industry or peer comparison, the Fair Ratio paints a more accurate picture because it incorporates both the company’s individual strengths and market risks, as well as sector dynamics and company size. This leads to fairer, context-rich conclusions about valuation.

With Brookfield’s actual PE ratio at 51.5x and the Fair Ratio at 32.5x, the stock appears overvalued on this measure.

Result: OVERVALUED

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Earlier we mentioned that there’s an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is your own story or perspective about a company; a way to connect what you believe about Brookfield Infrastructure Partners’ future with an actual forecast of its revenue, profit margins, and fair value.

Narratives let you go beyond just the numbers by linking your outlook on the company’s business trends, management decisions, and industry changes to specific financial forecasts and a resulting estimate of fair value. On Simply Wall St’s Community page, millions of investors are already using Narratives as an easy and accessible tool to make decisions by comparing their own fair value to today’s market price.

Importantly, Narratives update dynamically whenever new company news or financial results come in, helping you keep your view relevant and your decisions informed. For example, some investors see Brookfield’s long-term digital infrastructure growth as a catalyst for higher earnings and set bullish targets as high as $53, while others focus on industry risks and model more cautious targets as low as $31. This shows how the same company can inspire very different but well-founded investment decisions.

Do you think there’s more to the story for Brookfield Infrastructure Partners? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include BIP.

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