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Valuing FTSE shares is often more art than science. Ratios such as the price-to-earnings (P/E) ratio, price-to-book value and earnings yield can provide a useful starting point. But I think shares are too often judged by headline ratios – a deeper dive into financials can reveal hidden value.
Beyond the usual metrics, I also like to dig into the balance sheet. Debt levels, cash flows and margins all give a clearer view of how sustainable a company’s growth really is.
With that in mind, two FTSE shares I like the look of this month are Petershill Partners (LSE: PHLL) and EnQuest (LSE: ENQ). Both look undervalued relative to their earnings power, although each comes with its own set of risks.
Here, I explain why I think both stocks are worth keeping on the radar in September.
Petershill Partners
Petershill Partners is an investment firm that provides capital and strategic support to alternative asset managers. It is not a household name, yet its numbers caught my attention.
The share price is up only 7.5% over the past year, but earnings have grown 162%. That gives Petershill an eye-catching earnings yield of 25%. I could only find one other UK-listed investment trust with a higher yield. Add to that an extremely low P/E ratio of 4 and the combination looks tempting.
The market doesn’t appear to have priced in this growth just yet, so there could be potential for the share price to follow. That said, it would be unrealistic to expect earnings to continue expanding at that pace. Analysts have pencilled in a forward P/E ratio of 14, but this may also be factoring in some share price growth rather than a collapse in profitability.
One risk is that earnings from investment firms can be lumpy, especially when dependent on performance fees. Market downturns could also reduce valuations of the underlying assets Petershill manages.
What gives me confidence however, is the company’s free cash flow (FCF) margin of almost 60%. While that’s not unusual for an investment firm, it is high for one trading at such a low valuation.
If nothing else, Petershill has ample cash to plough into fresh opportunities, so I think it’s a good stock for investors to think about in September.
EnQuest
EnQuest is a small-cap oil and gas producer operating in the North Sea and Malaysia. It became profitable again in 2024, posting earnings of £73.39m and achieving a net margin of 7.88%.
The balance sheet also looks healthier. Over the past four years, EnQuest has cut its debt almost in half, from £1.5bn to £798m. Profitability is decent, with return on equity (ROE) standing at 18.5%. Most striking is the forward P/E ratio of just 2.8, which suggests high expectations of continued earnings growth.
Expansion plans are also noteworthy. In August, EnQuest signed production-sharing contracts with the Indonesian government to enter the Gaea and Gaea II exploration blocks in Papua Barat. This followed similar agreements in July to develop the Merpati Field offshore Brunei.
Oil and gas companies are exposed to notable risks and EnQuest is no exception. It faces volatile commodity prices, regulatory pressures and geopolitical uncertainty in unstable regions.
Still, with debt trending lower and fresh projects under way, I think it is another promising FTSE share to consider this month.
