Does Enea AB (publ)’s (STO:ENEA) PE Ratio Warrant A Buy?
Enea AB (publ) (OM:ENEA) is currently trading at a trailing P/E of 15.7x, which is lower than the industry average of 16.6x. While this makes ENEA appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Enea
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 ENEA
Price-Earnings Ratio = Price per share ÷ Earnings per share
ENEA Price-Earnings Ratio = SEK74.2 ÷ SEK4.727 = 15.7x
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 ENEA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since ENEA’s P/E of 15.7x is lower than its industry peers (16.6x), it means that investors are paying less than they should for each dollar of ENEA’s earnings. Therefore, according to this analysis, ENEA is an under-priced stock.
A few caveats
However, before you rush out to buy ENEA, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ENEA. 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 ENEA, 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 ENEA to are fairly valued by the market. If this does not hold, there is a possibility that ENEA’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.
