Zalando SE (XTRA:ZAL) is trading with a trailing P/E of 113.1x, which is higher than the industry average of 44.7x. 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Zalando
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 ZAL
Price-Earnings Ratio = Price per share ÷ Earnings per share
ZAL Price-Earnings Ratio = €47.16 ÷ €0.417 = 113.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to ZAL, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. ZAL’s P/E of 113.1x is higher than its industry peers (44.7x), which implies that each dollar of ZAL’s earnings is being overvalued by investors. As such, our analysis shows that ZAL represents an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that ZAL should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to ZAL, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with ZAL, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing ZAL to are fairly valued by the market. If this does not hold true, ZAL’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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.