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DistIT AB (publ) (OM:DIST) is currently trading at a trailing P/E of 14.8x, which is lower than the industry average of 20.5x. While DIST 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 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 DistIT
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 DIST
Price-Earnings Ratio = Price per share ÷ Earnings per share
DIST Price-Earnings Ratio = SEK44 ÷ SEK2.972 = 14.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to DIST, 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. DIST’s P/E of 14.8x is lower than its industry peers (20.5x), which implies that each dollar of DIST’s earnings is being undervalued by investors. Therefore, according to this analysis, DIST is an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that DIST 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 DIST. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with DIST, 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 DIST to are fairly valued by the market. If this does not hold, there is a possibility that DIST’s P/E is lower because our peer group is overvalued by the market.
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.