Should You Sell OMV Aktiengesellschaft (VIE:OMV) At This PE Ratio?
OMV Aktiengesellschaft (WBAG:OMV) is currently trading at a trailing P/E of 140.7x, which is higher than the industry average of 17.6x. While OMV 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for OMV
Breaking down 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 OMV
Price-Earnings Ratio = Price per share ÷ Earnings per share
OMV Price-Earnings Ratio = €55.14 ÷ €0.392 = 140.7x
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 OMV, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since OMV’s P/E of 140.7x is higher than its industry peers (17.6x), it means that investors are paying more than they should for each dollar of OMV’s earnings. As such, our analysis shows that OMV represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your OMV shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to OMV. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with OMV, 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 OMV to are fairly valued by the market. If this does not hold true, OMV’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 OMV. 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 OMV’s future growth? Take a look at our free research report of analyst consensus for OMV’s outlook.
Past Track Record: Has OMV 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 OMV’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.
