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Does Chr Hansen Holding A/S’s (CPH:CHR) PE Ratio Warrant A Sell?

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 Chr Hansen Holding A/S (CPH:CHR).

Chr Hansen Holding A/S (CPH:CHR) is currently trading at a trailing P/E of 50.4x, which is higher than the industry average of 18.3x. While CHR might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it.

What you need to know about 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 CHR

Price-Earnings Ratio = Price per share ÷ Earnings per share

CHR Price-Earnings Ratio = €85.96 ÷ €1.704 = 50.4x

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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as CHR, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since CHR’s P/E of 50.4x is higher than its industry peers (18.5x), it means that investors are paying more than they should for each dollar of CHR’s earnings. As such, our analysis shows that CHR represents an over-priced stock.

A few caveats

While our conclusion might prompt you to sell your CHR shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CHR. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with CHR, 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 CHR to are fairly valued by the market. If this is violated, CHR’s P/E may be lower than its peers as they are actually overvalued by investors.

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 CHR. 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:

1. Future Outlook: What are well-informed industry analysts predicting for CHR’s future growth? Take a look at our free research report of analyst consensus for CHR’s outlook.
2. Past Track Record: Has CHR 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 CHR’s historicals for more clarity.
3. 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.