Should You Be Tempted To Buy MCI Capital SA (WSE:MCI) At Its Current 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 MCI Capital SA (WSE:MCI)’s fundamentals and stock market performance.

MCI Capital SA (WSE:MCI) trades with a trailing P/E of 3.3x, which is lower than the industry average of 14.3x. While MCI 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

Breaking down the P/E ratio

The P/E ratio is one of many ratios used in relative valuation. 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.

Formula

Price-Earnings Ratio = Price per share ÷ Earnings per share

P/E Calculation for MCI

Price per share = PLN9.7

Earnings per share = PLN2.983

∴ Price-Earnings Ratio = PLN9.7 ÷ PLN2.983 = 3.3x

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 MCI, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use below. 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.

MCI’s P/E of 3.3x is lower than its industry peers (14.3x), which implies that each dollar of MCI’s earnings is being undervalued by investors. This multiple is a median of profitable companies of 24 Capital Markets companies in PL including Magna Polonia, ALTUS Towarzystwo Funduszy Inwestycyjnych and X-Trade Brokers Dom Maklerski. Therefore, according to this analysis, MCI is an under-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that MCI represents the perfect buying opportunity, it is important to realise that our conclusion rests on two important assertions. The first is that our “similar companies” are actually similar to MCI. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you accidentally compared higher growth firms with MCI, then MCI’s P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. Alternatively, if you inadvertently compared less risky firms with MCI, MCI’s P/E would again be lower since investors would reward its peers’ lower risk with a higher price as well. The second assumption that must hold true is that the stocks we are comparing MCI to are fairly valued by the market. If this assumption does not hold true, MCI’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 MCI. 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:

1. Future Outlook: What are well-informed industry analysts predicting for MCI’s future growth? Take a look at our free research report of analyst consensus for MCI’s outlook.
2. Past Track Record: Has MCI 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 MCI’s historicals for more clarity.
3. 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.

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