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The price/earnings (P/E) indicator is one of the simplest ways to value a company. The ratio is calculated by dividing the share price by the company’s earnings per share for a specified period, normally the last 12 months.
The metric can be manipulated to look at future value, called the forward P/E. And this is calculated using earnings forecasts for the coming year.
However, the metric cannot be used when a business is not making a profit. For example, growth stocks are often unprofitable for a considerable period of time. In fact, many fail to become profitable.
When evaluating nonprofit businesses, it would make more sense to use the price-to-sales ratio. So here are two of the cheapest UK-listed stocks, by P/E ratio, excluding distressed stocks like Polymetal.
Bank of Georgia
Bank of Georgia (LSE:BGEO) has a P/E ratio of just 4.9, less than half the FTSE 100 average. The Tbilisi-based bank is actually trading at a 52-week high, after falling to a 52-week low in March after Russia invaded Ukraine. Both countries are major trading partners of Georgia.
However, it has steadily gone from strength to strength in recent months. Bank of Georgia due to report results Tuesday, just days after peers Group to be confirmed. TBC pointed to increased operating costs, but reiterated the mid- to long-term outlook.
He hopes to improve on his excellent performance over the past fiscal year. Bank of Georgia made a pre-tax profit of £192m in 2021 – the figure is some distance above pre-pandemic levels.
In the long term, I am optimistic for this bank as I see the country as one of the most stable high growth markets in the world. However, I understand that there may be short-term challenges in the coming months as the global economy struggles with inflation and an expected economic slowdown.
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% on the year and has a P/E of 4.4. The company is certainly going through a difficult period, but I think there is considerable potential there. The losses have continued in recent months as employees go on strike.
The Postal Service said in July that revenue fell 11.5% year-on-year in the first quarter of its business year. It highlighted weakening retail trends, falling volumes of Covid-19 test kits and a return to a structural drop in letters.
However, it is truly a company in transition. One of the issues highlighted was the inability to scale to lower volumes. But that shouldn’t be a big problem in the future. Royal Mail is looking for efficiency and moving towards mechanized sorting of parcels and mail.
Before the pandemic, most packages were handled by hand. This is clearly an expensive process. But now that number is closer to 50% and that should help the company become leaner.
And there are growth areas in the business. Royal Mail said its Netherlands-based parcel service GLS expects annual operating profits of between 370 million and 410 million euros.
I already own Royal Mail shares but would buy more at this knockdown price.