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X-FAB Silicon Foundries SE (ENXTPA:XFAB) is trading with a trailing P/E of 14.7x, which is lower than the industry average of 61.3x. While XFAB 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. View our latest analysis for X-FAB Silicon Foundries
Breaking down the Price-Earnings 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 XFAB
Price-Earnings Ratio = Price per share ÷ Earnings per share
XFAB Price-Earnings Ratio = $10.76 ÷ $0.733 = 14.7x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to XFAB, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. XFAB’s P/E of 14.7x is lower than its industry peers (61.3x), which implies that each dollar of XFAB’s earnings is being undervalued by investors. Therefore, according to this analysis, XFAB is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy XFAB, 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 XFAB, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with XFAB, 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 XFAB to are fairly valued by the market. If this is violated, XFAB’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.