Should You Buy AP.N. Promise S.A. (WSE:PRO) At This PE Ratio?
AP.N. Promise S.A. (WSE:PRO) is trading with a trailing P/E of 4.6x, which is lower than the industry average of 12.7x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for A.P.N. Promise
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for PRO
Price-Earnings Ratio = Price per share ÷ Earnings per share
PRO Price-Earnings Ratio = PLN3.9 ÷ PLN0.842 = 4.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to PRO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. PRO’s P/E of 4.6x is lower than its industry peers (12.7x), which implies that each dollar of PRO’s earnings is being undervalued by investors. As such, our analysis shows that PRO represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy PRO, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PRO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with PRO, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing PRO to are fairly valued by the market. If this does not hold, there is a possibility that PRO’s P/E is lower because our peer group is overvalued by the market.
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.
