Yahoo Finance Should You Be Tempted To Buy Entersoft SA. (ATH:ENTER) Because Of Its PE Ratio?
Entersoft SA. (ATSE:ENTER) trades with a trailing P/E of 13.4x, which is lower than the industry average of 25.3x. While ENTER 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. See our latest analysis for Entersoft
Breaking down the Price-Earnings 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 ENTER
Price-Earnings Ratio = Price per share ÷ Earnings per share
ENTER Price-Earnings Ratio = €3.1 ÷ €0.231 = 13.4x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ENTER, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 13.4x, ENTER’s P/E is lower than its industry peers (25.3x). This implies that investors are undervaluing each dollar of ENTER’s earnings. Therefore, according to this analysis, ENTER is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy ENTER, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to ENTER. 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 ENTER, 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 ENTER to are fairly valued by the market. If this is violated, ENTER’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to ENTER. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:
Financial Health: Is ENTER’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has ENTER 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 ENTER’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.
