Yahoo Finance Is It Time To Buy Mapfre SA (BME:MAP) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Mapfre SA (BME:MAP)’s fundamentals and stock market performance.
Mapfre SA (BME:MAP) trades with a trailing P/E of 11.7x, which is lower than the industry average of 12.9x. While MAP 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 explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Mapfre
Breaking down the Price-Earnings 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 MAP
Price-Earnings Ratio = Price per share ÷ Earnings per share
MAP Price-Earnings Ratio = €2.56 ÷ €0.218 = 11.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to MAP, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. MAP’s P/E of 11.7x is lower than its industry peers (13.9x), which implies that each dollar of MAP’s earnings is being undervalued by investors. As such, our analysis shows that MAP represents an under-priced stock.
A few caveats
However, before you rush out to buy MAP, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to MAP, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with MAP, 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 MAP to are fairly valued by the market. If this does not hold, there is a possibility that MAP’s P/E is lower because our peer group is 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 MAP 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 MAP’s future growth? Take a look at our free research report of analyst consensus for MAP’s outlook.
Past Track Record: Has MAP 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 MAP’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.
