Does pferdewettende AG’s (FRA:EMH1) PE Ratio Warrant A Sell?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
pferdewettende AG (FRA:EMH1) is currently trading at a trailing P/E of 19.8, which is higher than the industry average of 16.3. Although some investors may see this as unappealing, it is important to understand the assumptions behind the P/E ratio before making judgments. Today, 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 pferdewetten.de
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for EMH1
Price-Earnings Ratio = Price per share ÷ Earnings per share
EMH1 Price-Earnings Ratio = €10.25 ÷ €0.517 = 19.8x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to EMH1, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 19.8, EMH1’s P/E is higher than its industry peers (16.3). This implies that investors are overvaluing each dollar of EMH1’s earnings. This multiple is a median of profitable companies of 10 Hospitality companies in DE including IFA Hotel & Touristik, ZEAL Network and TUI. You could also say that the market is suggesting that EMH1 is a stronger business than the average comparable company.
A few caveats
However, it is important to note that our examination of the stock is based on certain assumptions. The first is that our “similar companies” are actually similar to EMH1. If not, the difference in P/E might be a result of other factors. For example, pferdewettende AG could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. We should also be aware that the stocks we are comparing to EMH1 may not be fairly valued. So while we can reasonably surmise that it is optimistically valued relative to a peer group, it might be fairly valued, if the peer group is undervalued.
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 EMH1. 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 EMH1’s future growth? Take a look at our free research report of analyst consensus for EMH1’s outlook.
Past Track Record: Has EMH1 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 EMH1’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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
