Yahoo Finance Is It Time To Buy Bumitama Agri Ltd (SGX:P8Z) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in Bumitama Agri Ltd (SGX:P8Z).
Bumitama Agri Ltd (SGX:P8Z) is trading with a trailing P/E of 10.3x, which is lower than the industry average of 14.5x. 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Bumitama Agri
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 P8Z
Price-Earnings Ratio = Price per share ÷ Earnings per share
P8Z Price-Earnings Ratio = IDR6755.66 ÷ IDR655.424 = 10.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as P8Z, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. P8Z’s P/E of 10.3x is lower than its industry peers (14.5x), which implies that each dollar of P8Z’s earnings is being undervalued by investors. Therefore, according to this analysis, P8Z is an under-priced stock.
A few caveats
However, before you rush out to buy P8Z, 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 P8Z, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with P8Z, 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 P8Z to are fairly valued by the market. If this does not hold, there is a possibility that P8Z’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on P8Z, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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:
Future Outlook: What are well-informed industry analysts predicting for P8Z’s future growth? Take a look at our free research report of analyst consensus for P8Z’s outlook.
Past Track Record: Has P8Z been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of P8Z’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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.
