Should You Sell Funespaña SA. (BME:FUN) At This PE Ratio?
Funespaña SA. (BME:FUN) is currently trading at a trailing P/E of 25.3x, which is higher than the industry average of 23.9x. While this makes FUN appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. 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 Funespaña
What you need to know about the P/E ratio
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 FUN
Price-Earnings Ratio = Price per share ÷ Earnings per share
FUN Price-Earnings Ratio = €7.35 ÷ €0.291 = 25.3x
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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as FUN, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since FUN’s P/E of 25.3x is higher than its industry peers (23.9x), it means that investors are paying more than they should for each dollar of FUN’s earnings. Therefore, according to this analysis, FUN is an over-priced stock.
Assumptions to be aware of
Before you jump to the conclusion that FUN 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 FUN, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with FUN, 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 FUN to are fairly valued by the market. If this does not hold true, FUN’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.
