Does AKCEPT Finance SA.’s (WSE:AFC) PE Ratio Signal A Selling Opportunity?
AKCEPT Finance SA. (WSE:AFC) trades with a trailing P/E of 62.8x, which is higher than the industry average of 15.4x. While this makes AFC appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, 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 AKCEPT Finance
Demystifying the P/E ratio
P/E is a popular ratio used for relative valuation. 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 AFC
Price-Earnings Ratio = Price per share ÷ Earnings per share
AFC Price-Earnings Ratio = PLN0.58 ÷ PLN0.009 = 62.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 AFC, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. AFC’s P/E of 62.8x is higher than its industry peers (15.4x), which implies that each dollar of AFC’s earnings is being overvalued by investors. Therefore, according to this analysis, AFC is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that AFC should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to AFC. 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 AFC, 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 AFC to are fairly valued by the market. If this does not hold, there is a possibility that AFC’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.
