This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Kulcs-Soft Számítástechnika Nyrt (BUSE:KULCSSOFT).
Kulcs-Soft Számítástechnika Nyrt (BUSE:KULCSSOFT) is currently trading at a trailing P/E of 18.1x, which is lower than the industry average of 35x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Kulcs-Soft Számítástechnika Nyrt
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 KULCSSOFT
Price per share = HUF1230
Earnings per share = HUF68
∴ Price-Earnings Ratio = HUF1230 ÷ HUF68 = 18.1x
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 KULCSSOFT, 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 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.
At 18.1x, KULCSSOFT’s P/E is lower than its industry peers (35x). This implies that investors are undervaluing each dollar of KULCSSOFT’s earnings. As such, our analysis shows that KULCSSOFT represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy KULCSSOFT immediately, there are two important assumptions you should be aware of. The first is that our peer group actually contains companies that are similar to KULCSSOFT. 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 KULCSSOFT, then KULCSSOFT’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 KULCSSOFT. In this case, KULCSSOFT’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 KULCSSOFT to are fairly valued by the market. If this does not hold, there is a possibility that KULCSSOFT’s P/E is lower because firms in our peer group are being overvalued by the market.
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 KULCSSOFT. 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:
- Future Outlook: What are well-informed industry analysts predicting for KULCSSOFT’s future growth? Take a look at our free research report of analyst consensus for KULCSSOFT’s outlook.
- Financial Health: Is KULCSSOFT’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.