MOL Magyar Olaj- es Gazipari Nyilvanosan Mukodo Reszvenytarsasag (BUSE:MOL) trades with a trailing P/E of 7.3x, which is lower than the industry average of 14.9x. 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for MOL Magyar Olaj- es Gazipari Nyilvanosan Mukodo Reszvenytarsasag
Breaking down 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 MOL
Price-Earnings Ratio = Price per share ÷ Earnings per share
MOL Price-Earnings Ratio = HUF2844 ÷ HUF390.128 = 7.3x
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 MOL, 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. Since MOL’s P/E of 7.3x is lower than its industry peers (14.9x), it means that investors are paying less than they should for each dollar of MOL’s earnings. As such, our analysis shows that MOL represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy MOL immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to MOL. 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 MOL, 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 MOL to are fairly valued by the market. If this is violated, MOL’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on MOL, 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 urge you to complete your research by taking a look at the following: