In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to learn about the link between company’s fundamentals and stock market performance.
Progress Werk Oberkirch AG (FRA:PWO) is currently trading at a trailing P/E of 10.2x, which is lower than the industry average of 14x. 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. 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 Progress Werk Oberkirch
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 PWO
Price-Earnings Ratio = Price per share ÷ Earnings per share
PWO Price-Earnings Ratio = €37.2 ÷ €3.639 = 10.2x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 PWO, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. At 10.2, PWO’s P/E is lower than its industry peers (14). This implies that investors are undervaluing each dollar of PWO’s earnings. This multiple is a median of profitable companies of 15 Auto Components companies in DE including American Axle & Manufacturing Holdings, Schaeffler and LEONI. You can think of it like this: the market is suggesting that PWO is a weaker business than the average comparable company.
A few caveats
However, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PWO. 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 PWO, 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 PWO to are fairly valued by the market. If this does not hold, there is a possibility that PWO’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to PWO. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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: