GEK TERNA Holdings Real Estate, Construction SA. (ATSE:GEKTERNA) trades with a trailing P/E of 7x, which is lower than the industry average of 16.7x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for GEK TERNA Holdings Real Estate Construction
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 GEKTERNA
Price-Earnings Ratio = Price per share ÷ Earnings per share
GEKTERNA Price-Earnings Ratio = €5.03 ÷ €0.716 = 7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as GEKTERNA, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since GEKTERNA’s P/E of 7x is lower than its industry peers (16.7x), it means that investors are paying less than they should for each dollar of GEKTERNA’s earnings. As such, our analysis shows that GEKTERNA represents an under-priced stock.
A few caveats
Before you jump to the conclusion that GEKTERNA 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 GEKTERNA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with GEKTERNA, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing GEKTERNA to are fairly valued by the market. If this does not hold, there is a possibility that GEKTERNA’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 GEKTERNA, the undervaluation of the stock may mean it is a good time to top up on 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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Is GEKTERNA’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 GEKTERNA 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 GEKTERNA’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.