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 SpareBank 1 Nord-Norge (OB:NONG)’s fundamentals and stock market performance.
SpareBank 1 Nord-Norge (OB:NONG) is currently trading at a trailing P/E of 8.9x, which is lower than the industry average of 8.9x. While NONG 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. See our latest analysis for SpareBank 1 Nord-Norge
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 NONG
Price per share = NOK58.7
Earnings per share = NOK6.63
∴ Price-Earnings Ratio = NOK58.7 ÷ NOK6.63 = 8.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Ideally, we want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as NONG, such as size and country of operation. 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.
Since NONG’s P/E of 8.9x is lower than its industry peers (8.9x), it means that investors are paying less than they should for each dollar of NONG’s earnings. Therefore, according to this analysis, NONG is an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy NONG, 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 NONG. If this isn’t the case, the difference in P/E could be due to some other factors. For example, if you inadvertently compared lower risk firms with NONG, then investors would naturally value NONG at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with NONG, investors would also value NONG at a lower price since it is a lower growth investment. Both scenarios would explain why NONG has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing NONG to are fairly valued by the market. If this assumption does not hold true, NONG’s lower P/E ratio may be 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 NONG. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for NONG’s future growth? Take a look at our free research report of analyst consensus for NONG’s outlook.
- Past Track Record: Has NONG 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 NONG’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.