Vetrya Sp.A. (BIT:VTY) is trading with a trailing P/E of 21.8x, which is lower than the industry average of 26.6x. 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 explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Vetrya
Demystifying the P/E 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 VTY
Price-Earnings Ratio = Price per share ÷ Earnings per share
VTY Price-Earnings Ratio = €7.98 ÷ €0.367 = 21.8x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 VTY, 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. At 21.8x, VTY’s P/E is lower than its industry peers (26.6x). This implies that investors are undervaluing each dollar of VTY’s earnings. Therefore, according to this analysis, VTY is an under-priced stock.
Assumptions to watch out for
However, before you rush out to buy VTY, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to VTY. 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 VTY, 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 VTY to are fairly valued by the market. If this does not hold, there is a possibility that VTY’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on VTY, 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: