Sport Lisboa e Benfica – Futebol SAD (ENXTLS:SLBEN) is trading with a trailing P/E of 0.5x, which is lower than the industry average of 11.3x. While SLBEN 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 break down what the P/E ratio is, how to interpret it and what to watch out for. Check out our latest analysis for Sport Lisboa e Benfica – Futebol SAD

Demystifying the P/E ratio

P/E is a popular ratio used for 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 SLBEN Price per share = €1.47 Earnings per share = €2.695 ∴ Price-Earnings Ratio = €1.47 ÷ €2.695 = 0.5x

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 SLBEN, 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 similar companies should technically have similar P/E ratios, we can very quickly come to some conclusions about the stock if the ratios differ.

Since SLBEN’s P/E of 0.5x is lower than its industry peers (11.3x), it means that investors are paying less than they should for each dollar of SLBEN’s earnings. Therefore, according to this analysis, SLBEN is an under-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that SLBEN 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 SLBEN. If the companies aren’t similar, the difference in P/E might be a result of other factors. For example, if you inadvertently compared lower risk firms with SLBEN, then investors would naturally value SLBEN at a lower price since it is a riskier investment. Similarly, if you accidentally compared higher growth firms with SLBEN, investors would also value SLBEN at a lower price since it is a lower growth investment. Both scenarios would explain why SLBEN has a lower P/E ratio than its peers. The second assumption that must hold true is that the stocks we are comparing SLBEN to are fairly valued by the market. If this assumption is violated, SLBEN’s P/E may be lower than its peers because its peers are actually overvalued by investors.

What this means for you:

If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of SLBEN to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:

Financial Health: Is SLBEN’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 SLBEN 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 SLBEN’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.