Is IFA Hotel & Touristik Aktiengesellschaft (FRA:IFA) A Buy At Its Current PE Ratio?
IFA Hotel & Touristik Aktiengesellschaft (DB:IFA) is currently trading at a trailing P/E of 3.6x, which is lower than the industry average of 21.3x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for IFA Hotel & Touristik
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 IFA
Price-Earnings Ratio = Price per share ÷ Earnings per share
IFA Price-Earnings Ratio = €11.2 ÷ €3.08 = 3.6x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to IFA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. Since IFA’s P/E of 3.6x is lower than its industry peers (21.3x), it means that investors are paying less than they should for each dollar of IFA’s earnings. As such, our analysis shows that IFA represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that IFA 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 IFA, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with IFA, 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 IFA to are fairly valued by the market. If this is violated, IFA’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 IFA. 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 urge you to complete your research by taking a look at the following:
Financial Health: Is IFA’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has IFA 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 IFA’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.
