This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Bank Polska Kasa Opieki SA (WSE:PEO)’s fundamentals and stock market performance.
Bank Polska Kasa Opieki SA (WSE:PEO) trades with a trailing P/E of 12x, which is lower than the industry average of 13.6x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Bank Polska Kasa Opieki
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 PEO
Price-Earnings Ratio = Price per share ÷ Earnings per share
PEO Price-Earnings Ratio = PLN114.9 ÷ PLN9.593 = 12x
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 PEO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. PEO’s P/E of 12x is lower than its industry peers (13.6x), which implies that each dollar of PEO’s earnings is being undervalued by investors. As such, our analysis shows that PEO represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PEO is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to PEO. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PEO, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PEO to are fairly valued by the market. If this does not hold true, PEO’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to PEO. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for PEO’s future growth? Take a look at our free research report of analyst consensus for PEO’s outlook.
Past Track Record: Has PEO 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 PEO’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.