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Is It Time To Buy Zespól Elektrowni Patnów-Adamów-Konin SA. (WSE:ZEP) Based Off Its PE Ratio?

Zespól Elektrowni Patnów-Adamów-Konin SA. (WSE:ZEP) trades with a trailing P/E of 2.8x, which is lower than the industry average of 5.3x. While this makes ZEP 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Zespól Elektrowni Patnów-Adamów-Konin

What you need to know about 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 ZEP

Price-Earnings Ratio = Price per share ÷ Earnings per share

ZEP Price-Earnings Ratio = PLN10.14 ÷ PLN3.605 = 2.8x

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 ZEP, 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 ZEP’s P/E of 2.8x is lower than its industry peers (5.3x), it means that investors are paying less than they should for each dollar of ZEP’s earnings. Therefore, according to this analysis, ZEP is an under-priced stock.

A few caveats

While our conclusion might prompt you to buy ZEP immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ZEP, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ZEP, 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 ZEP to are fairly valued by the market. If this is violated, ZEP’s P/E may be lower than its peers as they are actually overvalued by investors.

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 ZEP 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:

1. Financial Health: Is ZEP’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.
2. Past Track Record: Has ZEP 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 ZEP’s historicals for more clarity.
3. 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.