Should You Be Tempted To Buy Stalexport Autostrady SA (WSE:STX) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.
Stalexport Autostrady SA (WSE:STX) trades with a trailing P/E of 4.8x, which is lower than the industry average of 19.1x. While this makes STX appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Stalexport Autostrady
What you need to know about the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. 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 STX
Price-Earnings Ratio = Price per share ÷ Earnings per share
STX Price-Earnings Ratio = PLN3.34 ÷ PLN0.690 = 4.8x
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 STX, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. STX’s P/E of 4.8 is lower than its industry peers (19.1), which implies that each dollar of STX’s earnings is being undervalued by investors. Since the Infrastructure sector in PL is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Avia Solutions Group, and . You can think of it like this: the market is suggesting that STX is a weaker business than the average comparable company.
Assumptions to be aware of
However, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to STX, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with STX, 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 STX to are fairly valued by the market. If this does not hold true, STX’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 STX 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for STX’s future growth? Take a look at our free research report of analyst consensus for STX’s outlook.
Past Track Record: Has STX 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 STX’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
