Yahoo Finance Is Lena Lighting SA. (WSE:LEN) A Buy At Its Current PE Ratio?
Lena Lighting SA. (WSE:LEN) is trading with a trailing P/E of 8.3x, which is lower than the industry average of 11.2x. While LEN 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Lena Lighting
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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.
P/E Calculation for LEN
Price-Earnings Ratio = Price per share ÷ Earnings per share
LEN Price-Earnings Ratio = PLN3.58 ÷ PLN0.433 = 8.3x
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. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as LEN, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. LEN’s P/E of 8.3x is lower than its industry peers (11.2x), which implies that each dollar of LEN’s earnings is being undervalued by investors. As such, our analysis shows that LEN represents an under-priced stock.
A few caveats
While our conclusion might prompt you to buy LEN immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to LEN, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with LEN, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing LEN to are fairly valued by the market. If this does not hold true, LEN’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on LEN, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 LEN’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.
Past Track Record: Has LEN 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 LEN’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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
