I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Picanol NV (EBR:PIC).
Picanol NV (EBR:PIC) is currently trading at a trailing P/E of 16x, which is lower than the industry average of 21.9x. 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. See our latest analysis for Picanol
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. 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 PIC
Price-Earnings Ratio = Price per share ÷ Earnings per share
PIC Price-Earnings Ratio = €92 ÷ €5.747 = 16x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to PIC, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since PIC’s P/E of 16x is lower than its industry peers (22.4x), it means that investors are paying less than they should for each dollar of PIC’s earnings. Therefore, according to this analysis, PIC is an under-priced stock.
A few caveats
However, before you rush out to buy PIC, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to PIC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with PIC, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing PIC to are fairly valued by the market. If this is violated, PIC’s P/E may be lower than its peers as they are actually overvalued by investors.
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 PIC. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PIC’s future growth? Take a look at our free research report of analyst consensus for PIC’s outlook.
- Past Track Record: Has PIC 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 PIC’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.