Graines Voltz (ENXTPA:GRVO) is currently trading at a trailing P/E of 18.1x, which is lower than the industry average of 23.5x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. 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 Graines Voltz
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 GRVO
Price-Earnings Ratio = Price per share ÷ Earnings per share
GRVO Price-Earnings Ratio = €47 ÷ €2.6 = 18.1x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GRVO, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. GRVO’s P/E of 18.1x is lower than its industry peers (23.5x), which implies that each dollar of GRVO’s earnings is being undervalued by investors. As such, our analysis shows that GRVO represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that GRVO 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 GRVO. 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 GRVO, 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 GRVO to are fairly valued by the market. If this is violated, GRVO’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.