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KST Beteiligungs AG (DB:KSW) is currently trading at a trailing P/E of 9x, which is lower than the industry average of 16.1x. 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. 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 KST Beteiligungs
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 KSW
Price-Earnings Ratio = Price per share ÷ Earnings per share
KSW Price-Earnings Ratio = €1.53 ÷ €0.17 = 9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to KSW, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. KSW’s P/E of 9x is lower than its industry peers (16.1x), which implies that each dollar of KSW’s earnings is being undervalued by investors. Therefore, according to this analysis, KSW is an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to buy KSW immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to KSW, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with KSW, 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 KSW to are fairly valued by the market. If this does not hold, there is a possibility that KSW’s P/E is lower because our peer group is 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.