Firma Oponiarska Debica Spólka Akcyjna (WSE:DBC) is currently trading at a trailing P/E of 14.9x, which is lower than the industry average of 18.5x. While this makes DBC appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Firma Oponiarska Debica Spólka Akcyjna
Demystifying the P/E ratio
P/E is a popular ratio used for 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 DBC
Price-Earnings Ratio = Price per share ÷ Earnings per share
DBC Price-Earnings Ratio = PLN130 ÷ PLN8.708 = 14.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to DBC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 14.9x, DBC’s P/E is lower than its industry peers (18.5x). This implies that investors are undervaluing each dollar of DBC’s earnings. As such, our analysis shows that DBC represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy DBC immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to DBC. 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 DBC, 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 DBC to are fairly valued by the market. If this is violated, DBC’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on DBC, 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 DBC’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 DBC 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 DBC’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.