Adval Tech Holding AG (SWX:ADVN) is currently trading at a trailing P/E of 19.9x, which is lower than the industry average of 26.7x. While ADVN 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. 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 Adval Tech Holding
Breaking down 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 ADVN
Price-Earnings Ratio = Price per share ÷ Earnings per share
ADVN Price-Earnings Ratio = CHF239 ÷ CHF11.982 = 19.9x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ADVN, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since ADVN’s P/E of 19.9x is lower than its industry peers (26.7x), it means that investors are paying less than they should for each dollar of ADVN’s earnings. As such, our analysis shows that ADVN represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that ADVN is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ADVN. 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 ADVN, 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 ADVN to are fairly valued by the market. If this does not hold, there is a possibility that ADVN’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to ADVN. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: