I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in Acciona SA (BME:ANA).
Acciona SA (BME:ANA) is trading with a trailing P/E of 18.3x, which is higher than the industry average of 12.6x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. Today, 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 Acciona
Breaking down the Price-Earnings 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 ANA
Price-Earnings Ratio = Price per share ÷ Earnings per share
ANA Price-Earnings Ratio = €71 ÷ €3.878 = 18.3x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to ANA, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. At 18.3x, ANA’s P/E is higher than its industry peers (13.3x). This implies that investors are overvaluing each dollar of ANA’s earnings. Therefore, according to this analysis, ANA is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your ANA shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to ANA, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with ANA, 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 ANA to are fairly valued by the market. If this does not hold, there is a possibility that ANA’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on ANA, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for ANA’s future growth? Take a look at our free research report of analyst consensus for ANA’s outlook.
- Past Track Record: Has ANA 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 ANA’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.