Yahoo Finance Should You Buy Endesa SA. (BME:ELE) At This PE Ratio?
Endesa SA. (BME:ELE) trades with a trailing P/E of 13.3x, which is lower than the industry average of 13.5x. While ELE 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. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Endesa
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 ELE
Price-Earnings Ratio = Price per share ÷ Earnings per share
ELE Price-Earnings Ratio = €19.91 ÷ €1.494 = 13.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ELE, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. ELE’s P/E of 13.3x is lower than its industry peers (13.5x), which implies that each dollar of ELE’s earnings is being undervalued by investors. As such, our analysis shows that ELE represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy ELE immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to ELE, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with ELE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing ELE to are fairly valued by the market. If this does not hold true, ELE’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 ELE 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for ELE’s future growth? Take a look at our free research report of analyst consensus for ELE’s outlook.
Past Track Record: Has ELE been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of ELE’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
