Should You Sell Tennant Company (NYSE:TNC) At This PE Ratio?
Tennant Company (NYSE:TNC) trades with a trailing P/E of 89.4x, which is higher than the industry average of 25x. While this makes TNC 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. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Tennant
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 TNC
Price-Earnings Ratio = Price per share ÷ Earnings per share
TNC Price-Earnings Ratio = $62.75 ÷ $0.702 = 89.4x
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. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to TNC, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since TNC’s P/E of 89.4x is higher than its industry peers (25x), it means that investors are paying more than they should for each dollar of TNC’s earnings. As such, our analysis shows that TNC represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your TNC shares, 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 TNC, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TNC, 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 TNC to are fairly valued by the market. If this does not hold, there is a possibility that TNC’s P/E is lower because our peer group is 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.
