Yahoo Finance Should You Be Tempted To Sell Enel SpA (BIT:ENEL) At Its Current PE Ratio?
I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Enel SpA (BIT:ENEL).
Enel SpA (BIT:ENEL) is trading with a trailing P/E of 12.6x, which is higher than the industry average of 12.6x. While this makes ENEL appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Enel
What you need to know about the P/E ratio
The P/E ratio is one of many ratios used in 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 ENEL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ENEL Price-Earnings Ratio = €4.83 ÷ €0.383 = 12.6x
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 ENEL, 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 ENEL’s P/E of 12.6x is lower than its industry peers (13.3x), it means that investors are paying less than they should for each dollar of ENEL’s earnings. As such, our analysis shows that ENEL represents an under-priced stock.
Assumptions to be aware of
While our conclusion might prompt you to sell your ENEL shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to ENEL. 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 ENEL, 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 ENEL to are fairly valued by the market. If this is violated, ENEL’s P/E may be lower than its peers as they are actually overvalued by investors.
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 ENEL 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:
Future Outlook: What are well-informed industry analysts predicting for ENEL’s future growth? Take a look at our free research report of analyst consensus for ENEL’s outlook.
Past Track Record: Has ENEL 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 ENEL’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.
