BO.S Better Online Solutions Ltd. (NASDAQ:BOSC) is trading with a trailing P/E of 9.3x, which is lower than the industry average of 30x. While this makes BOSC appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for B.O.S Better Online Solutions
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 BOSC
Price-Earnings Ratio = Price per share ÷ Earnings per share
BOSC Price-Earnings Ratio = $2.27 ÷ $0.244 = 9.3x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BOSC, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. BOSC’s P/E of 9.3x is lower than its industry peers (30x), which implies that each dollar of BOSC’s earnings is being undervalued by investors. As such, our analysis shows that BOSC represents an under-priced stock.
A few caveats
Before you jump to the conclusion that BOSC is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to BOSC, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BOSC, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing BOSC to are fairly valued by the market. If this does not hold true, BOSC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on BOSC, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Financial Health: Is BOSC’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has BOSC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of BOSC’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.