Neste Oyj (HLSE:NESTE) is trading with a trailing P/E of 17.1x, which is higher than the industry average of 14.8x. While this makes NESTE 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Neste Oyj
Breaking down the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 NESTE
Price-Earnings Ratio = Price per share ÷ Earnings per share
NESTE Price-Earnings Ratio = €70.88 ÷ €4.136 = 17.1x
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 NESTE, 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. At 17.1x, NESTE’s P/E is higher than its industry peers (14.8x). This implies that investors are overvaluing each dollar of NESTE’s earnings. Therefore, according to this analysis, NESTE is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your NESTE shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to NESTE. 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 NESTE, 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 NESTE to are fairly valued by the market. If this is violated, NESTE’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 NESTE. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for NESTE’s future growth? Take a look at our free research report of analyst consensus for NESTE’s outlook.
- Past Track Record: Has NESTE 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 NESTE’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.