AIXTRON SE (DB:AIXA) trades with a trailing P/E of 46.2x, which is higher than the industry average of 24.2x. While this makes AIXA appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for AIXTRON
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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.
P/E Calculation for AIXA
Price-Earnings Ratio = Price per share ÷ Earnings per share
AIXA Price-Earnings Ratio = €13.4 ÷ €0.29 = 46.2x
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 AIXA, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since AIXA’s P/E of 46.2x is higher than its industry peers (24.2x), it means that investors are paying more than they should for each dollar of AIXA’s earnings. As such, our analysis shows that AIXA represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that AIXA should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AIXA, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with AIXA, 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 AIXA to are fairly valued by the market. If this does not hold, there is a possibility that AIXA’s P/E is lower because our peer group is 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 overvaluation could signal a potential selling opportunity to reduce your exposure to AIXA. 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for AIXA’s future growth? Take a look at our free research report of analyst consensus for AIXA’s outlook.
- Past Track Record: Has AIXA 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 AIXA’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.