SnowWorld NV. (ENXTAM:SNOW) is trading with a trailing P/E of 12.5x, which is lower than the industry average of 21.5x. While SNOW 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. See our latest analysis for SnowWorld
Breaking down the P/E 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 SNOW
Price-Earnings Ratio = Price per share ÷ Earnings per share
SNOW Price-Earnings Ratio = €9.46 ÷ €0.755 = 12.5x
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 SNOW, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. SNOW’s P/E of 12.5x is lower than its industry peers (21.5x), which implies that each dollar of SNOW’s earnings is being undervalued by investors. Therefore, according to this analysis, SNOW is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy SNOW, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to SNOW, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with SNOW, 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 SNOW to are fairly valued by the market. If this does not hold true, SNOW’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.