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What Does TPI Composites Inc’s (NASDAQ:TPIC) PE Ratio Tell You?

The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to start learning about core concepts of fundamental analysis on practical examples from today’s market.

TPI Composites Inc (NASDAQ:TPIC) trades with a trailing P/E of 28.2, which is higher than the industry average of 18.3. 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 break down what the P/E ratio is, how to interpret it and what to watch out for.

See our latest analysis for TPI Composites

Breaking down the P/E ratio

NasdaqGM:TPIC PE PEG Gauge October 5th 18

The P/E ratio is one of many ratios used in 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 TPIC

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

TPIC Price-Earnings Ratio = $27.8 ÷ $0.984 = 28.2x

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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to TPIC, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since TPIC’s P/E of 28.2 is higher than its industry peers (18.3), it means that investors are paying more for each dollar of TPIC’s earnings. This multiple is a median of profitable companies of 24 Electrical companies in US including Vivint Solar, Highpower International and Asia Pacific Wire & Cable. You could also say that the market is suggesting that TPIC is a stronger business than the average comparable company.

Assumptions to be aware of

Before you jump to conclusions it is important to realise that there are assumptions in this analysis. Firstly, that our peer group contains companies that are similar to TPIC. If this isn’t the case, the difference in P/E could be due to other factors. For example, TPI Composites Inc could be growing more quickly than the companies we’re comparing it with. In that case it would deserve a higher P/E ratio. Of course, it is possible that the stocks we are comparing with TPIC are not fairly valued. Just because it is trading on a higher P/E ratio than its peers does not mean it must be overvalued. After all, the peer group could be 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 TPIC. 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 TPIC’s future growth? Take a look at our free research report of analyst consensus for TPIC’s outlook.
  2. Past Track Record: Has TPIC 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 TPIC’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 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.