Should You Sell Convatec Group Plc (LON:CTEC) At This PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Convatec Group Plc (LON:CTEC).
Convatec Group Plc (LON:CTEC) is trading with a trailing P/E of 37x, which is higher than the industry average of 31.5x. While CTEC might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Convatec Group
Breaking down the Price-Earnings ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 CTEC
Price-Earnings Ratio = Price per share ÷ Earnings per share
CTEC Price-Earnings Ratio = $3 ÷ $0.0812 = 37x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CTEC, 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. CTEC’s P/E of 37x is higher than its industry peers (31.5x), which implies that each dollar of CTEC’s earnings is being overvalued by investors. Therefore, according to this analysis, CTEC is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your CTEC shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CTEC. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with CTEC, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CTEC to are fairly valued by the market. If this does not hold true, CTEC’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
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 CTEC. 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:
Future Outlook: What are well-informed industry analysts predicting for CTEC’s future growth? Take a look at our free research report of analyst consensus for CTEC’s outlook.
Past Track Record: Has CTEC 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 CTEC’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.
