Brenntag AG (XTRA:BNR) is currently trading at a trailing P/E of 20.9x, which is higher than the industry average of 16.7x. While this makes BNR 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. Check out our latest analysis for Brenntag
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 BNR
Price-Earnings Ratio = Price per share ÷ Earnings per share
BNR Price-Earnings Ratio = €50.4 ÷ €2.409 = 20.9x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as BNR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 20.9x, BNR’s P/E is higher than its industry peers (16.7x). This implies that investors are overvaluing each dollar of BNR’s earnings. As such, our analysis shows that BNR represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your BNR 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 BNR, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with BNR, 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 BNR to are fairly valued by the market. If this does not hold, there is a possibility that BNR’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 BNR, 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for BNR’s future growth? Take a look at our free research report of analyst consensus for BNR’s outlook.
- Past Track Record: Has BNR 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 BNR’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.