Taaleri Oyj (HLSE:TAALA) is trading with a trailing P/E of 13.5x, which is lower than the industry average of 15.2x. While TAALA 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Taaleri Oyj

What you need to know about 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 TAALA

Price-Earnings Ratio = Price per share ÷ Earnings per share

TAALA Price-Earnings Ratio = €10.2 ÷ €0.758 = 13.5x

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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TAALA, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. Since TAALA’s P/E of 13.5x is lower than its industry peers (15.2x), it means that investors are paying less than they should for each dollar of TAALA’s earnings. As such, our analysis shows that TAALA represents an under-priced stock.

A few caveats

While our conclusion might prompt you to buy TAALA immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to TAALA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with TAALA, 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 TAALA to are fairly valued by the market. If this does not hold true, TAALA’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.