The Brink’s Company (NYSE:BCO) trades with a trailing P/E of 49.4x, which is higher than the industry average of 20x. While this makes BCO 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Brink’s
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.
P/E Calculation for BCO
Price-Earnings Ratio = Price per share ÷ Earnings per share
BCO Price-Earnings Ratio = $81.3 ÷ $1.646 = 49.4x
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 BCO, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. BCO’s P/E of 49.4x is higher than its industry peers (20x), which implies that each dollar of BCO’s earnings is being overvalued by investors. Therefore, according to this analysis, BCO is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your BCO shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BCO, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BCO, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing BCO to are fairly valued by the market. If this does not hold, there is a possibility that BCO’s P/E is lower because our peer group is overvalued by the market.
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.