Scout24 AG (DB:G24) is trading with a trailing P/E of 42.5x, which is higher than the industry average of 37.3x. 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Scout24
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 G24
Price-Earnings Ratio = Price per share ÷ Earnings per share
G24 Price-Earnings Ratio = €45.92 ÷ €1.08 = 42.5x
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 G24, 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. G24’s P/E of 42.5x is higher than its industry peers (37.3x), which implies that each dollar of G24’s earnings is being overvalued by investors. Therefore, according to this analysis, G24 is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your G24 shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to G24, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with G24, 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 G24 to are fairly valued by the market. If this does not hold, there is a possibility that G24’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in G24. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 G24’s future growth? Take a look at our free research report of analyst consensus for G24’s outlook.
- Financial Health: Is G24’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- 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.