Is Fresenius Medical Care AG & Co KGaA (ETR:FME) A Buy At Its Current PE Ratio?
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 better understand how you can grow your money by investing in Fresenius Medical Care AG & Co KGaA (ETR:FME).
Fresenius Medical Care AG & Co KGaA (ETR:FME) is trading with a trailing P/E of 21.2x, which is lower than the industry average of 22x. While FME might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Fresenius Medical Care KGaA
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 FME
Price-Earnings Ratio = Price per share ÷ Earnings per share
FME Price-Earnings Ratio = €86.28 ÷ €4.077 = 21.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to FME, 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. FME’s P/E of 21.2x is lower than its industry peers (22x), which implies that each dollar of FME’s earnings is being undervalued by investors. As such, our analysis shows that FME represents an under-priced stock.
A few caveats
However, before you rush out to buy FME, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to FME, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with FME, 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 FME to are fairly valued by the market. If this is violated, FME’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 undervaluation could signal a good buying opportunity to increase your exposure to FME. 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 FME’s future growth? Take a look at our free research report of analyst consensus for FME’s outlook.
Past Track Record: Has FME 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 FME’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.
