# Is Komputronik SA’s (WSE:KOM) PE Ratio A Signal To Buy For Investors?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Komputronik SA (WSE:KOM)’s fundamentals and stock market performance.

Komputronik SA (WSE:KOM) trades with a trailing P/E of 4x, which is lower than the industry average of 6.9x. While this makes KOM appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for.

### Breaking down 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.

Formula

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

P/E Calculation for KOM

Price per share = PLN5.3

Earnings per share = PLN1.325

∴ Price-Earnings Ratio = PLN5.3 ÷ PLN1.325 = 4x

The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to KOM, 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.

At 4x, KOM’s P/E is lower than its industry peers (6.9x). This implies that investors are undervaluing each dollar of KOM’s earnings. Therefore, according to this analysis, KOM is an under-priced stock.

### A few caveats

However, before you rush out to buy KOM, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to KOM. 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 KOM, then KOM’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 KOM, KOM’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 KOM to are fairly valued by the market. If this does not hold, there is a possibility that KOM’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 KOM. 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 KOM’s future growth? Take a look at our free research report of analyst consensus for KOM’s outlook.
2. Past Track Record: Has KOM 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 KOM’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.