Should You Buy Iberdrola SA. (BME:IBE) At This PE Ratio?
Iberdrola SA. (BME:IBE) trades with a trailing P/E of 12.6x, which is lower than the industry average of 13.9x. While IBE might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, 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 Iberdrola
Breaking down 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 IBE
Price-Earnings Ratio = Price per share ÷ Earnings per share
IBE Price-Earnings Ratio = €6 ÷ €0.478 = 12.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as IBE, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since IBE’s P/E of 12.6x is lower than its industry peers (13.9x), it means that investors are paying less than they should for each dollar of IBE’s earnings. Therefore, according to this analysis, IBE is an under-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that IBE 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 IBE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with IBE, 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 IBE to are fairly valued by the market. If this is violated, IBE’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
