Biuro Inwestycji Kapitalowych SA. (WSE:BIK) is trading with a trailing P/E of 15.7x, which is higher than the industry average of 9.7x. 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 Biuro Inwestycji Kapitalowych
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 BIK
Price-Earnings Ratio = Price per share ÷ Earnings per share
BIK Price-Earnings Ratio = PLN17.05 ÷ PLN1.085 = 15.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BIK, 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. At 15.7x, BIK’s P/E is higher than its industry peers (9.7x). This implies that investors are overvaluing each dollar of BIK’s earnings. Therefore, according to this analysis, BIK is an over-priced stock.
A few caveats
However, before you rush out to sell your BIK shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to BIK. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with BIK, 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 BIK to are fairly valued by the market. If this is violated, BIK’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on BIK, 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 BIK’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 BIK 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 BIK’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.