Nowoczesna Firma SA. (WSE:NFP) trades with a trailing P/E of 91.3x, which is higher than the industry average of 38.3x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, 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 Nowoczesna Firma
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 NFP
Price-Earnings Ratio = Price per share ÷ Earnings per share
NFP Price-Earnings Ratio = PLN0.34 ÷ PLN0.004 = 91.3x
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 NFP, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. NFP’s P/E of 91.3x is higher than its industry peers (38.3x), which implies that each dollar of NFP’s earnings is being overvalued by investors. As such, our analysis shows that NFP represents an over-priced stock.
A few caveats
Before you jump to the conclusion that NFP 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 NFP. 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 NFP, 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 NFP to are fairly valued by the market. If this is violated, NFP’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.