The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between SW Umwelttechnik Stoiser & Wolschner AG (WBAG:SWUT)’s fundamentals and stock market performance.
SW Umwelttechnik Stoiser & Wolschner AG (WBAG:SWUT) is currently trading at a trailing P/E of 5.4x, which is lower than the industry average of 17.3x. While SWUT 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 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 SW Umwelttechnik Stoiser & Wolschner
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for SWUT
Price per share = €9.15
Earnings per share = €1.691
∴ Price-Earnings Ratio = €9.15 ÷ €1.691 = 5.4x
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 SWUT, 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. Since it is expected that similar companies have similar P/E ratios, we can come to some conclusions about the stock if the ratios are different.
Since SWUT’s P/E of 5.4x is lower than its industry peers (17.3x), it means that investors are paying less than they should for each dollar of SWUT’s earnings. As such, our analysis shows that SWUT represents an under-priced stock.
A few caveats
However, before you rush out to buy SWUT, it is important to note that this conclusion is based on two key assumptions. The first is that our peer group actually contains companies that are similar to SWUT. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you are inadvertently comparing lower risk firms with SWUT, then SWUT’s P/E would naturally be lower than its peers, since investors would value those with lower risk with a higher price. The other possibility is if you were accidentally comparing higher growth firms with SWUT. In this case, SWUT’s P/E would be lower since investors would also reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing SWUT to are fairly valued by the market. If this assumption is violated, SWUT’s P/E may be lower than its peers because its peers are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on SWUT, 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 urge you to complete your research by taking a look at the following:
- Financial Health: Is SWUT’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 SWUT 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 SWUT’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.