Is Pragma Faktoring Spolka Akcyjna’s (WSE:PRF) PE Ratio A Signal To Sell For Investors?
Pragma Faktoring Spolka Akcyjna (WSE:PRF) is trading with a trailing P/E of 14.5x, which is higher than the industry average of 14.4x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Pragma Faktoring Spolka Akcyjna
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 PRF
Price-Earnings Ratio = Price per share ÷ Earnings per share
PRF Price-Earnings Ratio = PLN19.45 ÷ PLN1.337 = 14.5x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PRF, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 14.5x, PRF’s P/E is higher than its industry peers (14.4x). This implies that investors are overvaluing each dollar of PRF’s earnings. As such, our analysis shows that PRF represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your PRF shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to PRF, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with PRF, 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 PRF to are fairly valued by the market. If this does not hold, there is a possibility that PRF’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on PRF, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 PRF’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 PRF 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 PRF’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.
