Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt (BUSE:BIF) trades with a trailing P/E of 29.4x, which is higher than the industry average of 10.5x. While BIF might seem like a stock to avoid or sell if you own it, 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. Check out our latest analysis for Budapesti Ingatlan Hasznosítási és Fejlesztési Nyrt
Demystifying the P/E ratio
P/E is a popular ratio used for 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.
Price-Earnings Ratio = Price per share ÷ Earnings per share
P/E Calculation for BIF
Price per share = HUF1900
Earnings per share = HUF64.545
∴ Price-Earnings Ratio = HUF1900 ÷ HUF64.545 = 29.4x
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. Ultimately, our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to BIF, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.
Since BIF’s P/E of 29.4x is higher than its industry peers (10.5x), it means that investors are paying more than they should for each dollar of BIF’s earnings. Therefore, according to this analysis, BIF is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that BIF should be banished from your portfolio, it is important to realise that our conclusion rests on two important assertions. The first is that our peer group actually contains companies that are similar to BIF. 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 riskier firms with BIF, then BIF’s P/E would naturally be higher than its peers since investors would reward its lower risk with a higher price. The other possibility is if you were accidentally comparing lower growth firms with BIF. In this case, BIF’s P/E would be higher since investors would also reward BIF’s higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing BIF to are fairly valued by the market. If this assumption is violated, BIF’s P/E may be higher than its peers because its peers are actually undervalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to BIF. 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 BIF’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.
- 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.