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Beluga Group Public Joint-Stock Company (MISX:BELU) is trading with a trailing P/E of 18.2x, which is lower than the industry average of 24.9x. While BELU 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 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 Beluga Group
Breaking down the P/E ratio
P/E is a popular ratio used for 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 BELU
Price-Earnings Ratio = Price per share ÷ Earnings per share
BELU Price-Earnings Ratio = RUB630 ÷ RUB34.602 = 18.2x
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 BELU, 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 BELU’s P/E of 18.2x is lower than its industry peers (24.9x), it means that investors are paying less than they should for each dollar of BELU’s earnings. As such, our analysis shows that BELU represents an under-priced stock.
A few caveats
Before you jump to the conclusion that BELU 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 BELU. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with BELU, 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 BELU to are fairly valued by the market. If this does not hold true, BELU’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of BELU to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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: