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Pepees SA. (WSE:PPS) trades with a trailing P/E of 7.6x, which is lower than the industry average of 10.1x. While PPS 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Pepees
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. 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 PPS
Price-Earnings Ratio = Price per share ÷ Earnings per share
PPS Price-Earnings Ratio = PLN1.55 ÷ PLN0.204 = 7.6x
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 PPS, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. PPS’s P/E of 7.6x is lower than its industry peers (10.1x), which implies that each dollar of PPS’s earnings is being undervalued by investors. As such, our analysis shows that PPS represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy PPS immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to PPS. 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 PPS, 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 PPS to are fairly valued by the market. If this does not hold true, PPS’s lower P/E ratio may be because firms in our peer group are 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.