In This Article:
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Hellenic Petroleum SA (ATH:ELPE) is trading with a trailing P/E of 6.5x, which is lower than the industry average of 13.5x. While ELPE 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.
View our latest analysis for Hellenic Petroleum
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. 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 ELPE
Price-Earnings Ratio = Price per share ÷ Earnings per share
ELPE Price-Earnings Ratio = €7.05 ÷ €1.086 = 6.5x
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 ELPE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since ELPE’s P/E of 6.5x is lower than its industry peers (13.5x), it means that investors are paying less than they should for each dollar of ELPE’s earnings. Since the Oil and Gas sector in GR is relatively small, I’ve included similar companies in the wider region in order to get a better idea of the multiple, which is a median of profitable companies of companies such as Motor Oil (Hellas) Corinth Refineries, Elinoil Hellenic Petroleum and . Therefore, according to this analysis, ELPE is an under-priced stock.
A few caveats
Before you jump to the conclusion that ELPE 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 ELPE. 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 ELPE, 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 ELPE to are fairly valued by the market. If this does not hold true, ELPE’s lower P/E ratio may be because firms in our peer group are overvalued by the market.