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Burgenland Holding Aktiengesellschaft (WBAG:BHD) is currently trading at a trailing P/E of 21.5x, which is lower than the industry average of 27.5x. While this makes BHD appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Burgenland Holding
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief 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 BHD
Price-Earnings Ratio = Price per share ÷ Earnings per share
BHD Price-Earnings Ratio = €75 ÷ €3.484 = 21.5x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BHD, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. BHD’s P/E of 21.5x is lower than its industry peers (27.5x), which implies that each dollar of BHD’s earnings is being undervalued by investors. As such, our analysis shows that BHD represents an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy BHD, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to BHD. 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 BHD, 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 BHD to are fairly valued by the market. If this does not hold true, BHD’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.