Should You Buy Prime Car Management SA (WSE:PCM) At This PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Prime Car Management SA (WSE:PCM).
Prime Car Management SA (WSE:PCM) is currently trading at a trailing P/E of 5.3x, which is lower than the industry average of 16.4x. 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. See our latest analysis for Prime Car Management
Breaking down 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 PCM
Price-Earnings Ratio = Price per share ÷ Earnings per share
PCM Price-Earnings Ratio = PLN13.3 ÷ PLN2.523 = 5.3x
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 PCM, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. PCM’s P/E of 5.3x is lower than its industry peers (16.4x), which implies that each dollar of PCM’s earnings is being undervalued by investors. Therefore, according to this analysis, PCM is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that PCM 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 PCM, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with PCM, 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 PCM to are fairly valued by the market. If this is violated, PCM’s P/E may be lower than its peers as they are actually overvalued by investors.
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 PCM. 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 PCM’s future growth? Take a look at our free research report of analyst consensus for PCM’s outlook.
Past Track Record: Has PCM 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 PCM’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.
