In This Article:
Bâloise Holding AG (SWX:BALN) trades with a trailing P/E of 12.7x, which is lower than the industry average of 13x. While this makes BALN 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. See our latest analysis for Bâloise Holding
Demystifying 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. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for BALN
Price-Earnings Ratio = Price per share ÷ Earnings per share
BALN Price-Earnings Ratio = CHF146.1 ÷ CHF11.503 = 12.7x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BALN, 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. Since BALN’s P/E of 12.7x is lower than its industry peers (13x), it means that investors are paying less than they should for each dollar of BALN’s earnings. As such, our analysis shows that BALN represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy BALN immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BALN, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BALN, 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 BALN to are fairly valued by the market. If this is violated, BALN’s P/E may be lower than its peers as they are actually overvalued by investors.
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.