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SW Umwelttechnik Stoiser & Wolschner AG (WBAG:SWUT) trades with a trailing P/E of 6.4x, which is lower than the industry average of 15.9x. While SWUT 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for SW Umwelttechnik Stoiser & Wolschner
Breaking down the Price-Earnings ratio
The P/E ratio is one of many ratios used in relative valuation. 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 SWUT
Price-Earnings Ratio = Price per share ÷ Earnings per share
SWUT Price-Earnings Ratio = €10.8 ÷ €1.691 = 6.4x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SWUT, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. SWUT’s P/E of 6.4x is lower than its industry peers (15.9x), which implies that each dollar of SWUT’s earnings is being undervalued by investors. As such, our analysis shows that SWUT represents an under-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that SWUT is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to SWUT. 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 SWUT, 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 SWUT to are fairly valued by the market. If this does not hold true, SWUT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on SWUT, 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: