Eltrak SA. (ATSE:ELTRK) trades with a trailing P/E of 9.2x, which is lower than the industry average of 16.6x. While ELTRK 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. Check out our latest analysis for Eltrak
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 ELTRK
Price-Earnings Ratio = Price per share ÷ Earnings per share
ELTRK Price-Earnings Ratio = €3.24 ÷ €0.351 = 9.2x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as ELTRK, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since ELTRK’s P/E of 9.2x is lower than its industry peers (16.6x), it means that investors are paying less than they should for each dollar of ELTRK’s earnings. Therefore, according to this analysis, ELTRK is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy ELTRK immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ELTRK. 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 ELTRK, 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 ELTRK to are fairly valued by the market. If this is violated, ELTRK’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 ELTRK 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: