Should You Sell Julius Baer Group Ltd (VTX:BAER) At This PE Ratio?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between Julius Baer Group Ltd (VTX:BAER)’s fundamentals and stock market performance.
Julius Baer Group Ltd (VTX:BAER) is currently trading at a trailing P/E of 18.2x, which is higher than the industry average of 17.8x. 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. 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 Julius Baer Group
What you need to know about the P/E 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 BAER
Price-Earnings Ratio = Price per share ÷ Earnings per share
BAER Price-Earnings Ratio = CHF59.04 ÷ CHF3.25 = 18.2x
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 BAER, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since BAER’s P/E of 18.2x is higher than its industry peers (17.8x), it means that investors are paying more than they should for each dollar of BAER’s earnings. Therefore, according to this analysis, BAER is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your BAER shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to BAER. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with BAER, 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 BAER to are fairly valued by the market. If this does not hold, there is a possibility that BAER’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on BAER, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 BAER’s future growth? Take a look at our free research report of analyst consensus for BAER’s outlook.
Past Track Record: Has BAER 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 BAER’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.
