The price-to-earnings (P/E) metric is one of the simplest ways of valuing a company. The ratio is calculated by dividing the stock price by the company’s earnings per share for a designated period, normally the past 12 months.
The metric can be manipulated to look at future value, called the forward P/E. And this is calculated using the profit guidance for the year ahead.
However, the metric cannot be used when a company isn’t making a profit. For example, growth stocks are often unprofitable for a considerable period of time. In fact, many don’t succeed in becoming profitable.
Should you invest £1,000 in Bank of Georgia right now?
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When valuing non-profit making companies, it would make more sense to use the price-to-sales ratio. So here are two of the cheapest UK-listed stocks, according to the P/E ratio, with the exception of distressed shares like Polymetal.
Bank of Georgia
Bank of Georgia (LSE:BGEO) has a P/E ratio of just 4.9 — that’s less than half of the FTSE 100 average. The Tbilisi-based bank is actually trading at a 52-week high, having fallen to a 52-week low in March following Russia’s invasion of Ukraine. Both countries are major trading partners of Georgia.
However, it has gone from strength to strength in recent months. Bank of Georgia is due to give its results on Tuesday, just days after peers TBC Group. TBC highlighted expanding operating costs but reiterated medium- and long-term guidance.
It will hope to improve on its stellar performance during the last financial year. Bank of Georgia delivered £192m in pre-tax profit in 2021 — the figure is some distance above pre-pandemic levels.
In the long run, I’m bullish on this bank as I see the country as one of the most stable high-growth markets in the world. However, I do appreciate there could be some short-term challenges in the coming months as the global economy battles inflation and a forecast economic downturn.
I bought Bank of Georgia in March and would buy more at the current price.
Royal Mail Group
Royal Mail Group (LSE:RMG) is down 48% over the year and has a P/E of 4.4. The company is certainly going through a challenging period, but I think there is considerable potential here. Losses have been extended in recent months as employees walk out on strike.
The postal service said in July that revenues had fallen 11.5% year-on-year during the first quarter of its trading year. It highlighted weakening retail trends, lower Covid-19 test kit volumes, and a return to a structural decline in letters.
However, this is very much a business in transition. One of the issues highlighted was the inability to adjust to lower volumes. But that shouldn’t be a big issue going forward. Royal Mail is on an efficiency drive and is shifting towards the mechanisation of sorting parcels and mail.
Before the pandemic, most parcels were processed by hand. Clearly that’s a costly process. But now that number is closer to 50% and this should help the business become leaner.
And there are growth areas in the buisness. Royal Mail said its Netherlands-based parcel service GLS expects full-year operating profits ranging €370m-€410m.
I already own Royal Mail stock, but would buy more at this knockdown price.
