Fabege AB (publ) (OM:FABG) is trading with a trailing P/E of 4.7x, which is lower than the industry average of 7.4x. While FABG might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Fabege
Breaking down the Price-Earnings 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 FABG
Price-Earnings Ratio = Price per share ÷ Earnings per share
FABG Price-Earnings Ratio = SEK102.54 ÷ SEK22.034 = 4.7x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FABG, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since FABG’s P/E of 4.7x is lower than its industry peers (7.4x), it means that investors are paying less than they should for each dollar of FABG’s earnings. Therefore, according to this analysis, FABG is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy FABG, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to FABG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with FABG, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing FABG to are fairly valued by the market. If this does not hold true, FABG’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of FABG to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for FABG’s future growth? Take a look at our free research report of analyst consensus for FABG’s outlook.
- Past Track Record: Has FABG 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 FABG’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.