Does ICA Gruppen AB (publ)’s (STO:ICA) PE Ratio Warrant A Buy?
ICA Gruppen AB (publ) (OM:ICA) trades with a trailing P/E of 14.4x, which is lower than the industry average of 18.9x. 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for ICA Gruppen
What you need to know about the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 ICA
Price-Earnings Ratio = Price per share ÷ Earnings per share
ICA Price-Earnings Ratio = SEK295.4 ÷ SEK20.532 = 14.4x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ICA, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. At 14.4x, ICA’s P/E is lower than its industry peers (18.9x). This implies that investors are undervaluing each dollar of ICA’s earnings. As such, our analysis shows that ICA represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy ICA, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ICA. 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 ICA, 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 ICA to are fairly valued by the market. If this does not hold true, ICA’s lower P/E ratio may be because firms in our peer group are 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.
