Is Swiss Re Ltd’s (VTX:SREN) PE Ratio A Signal To Sell For Investors?
Swiss Re Ltd (SWX:SREN) is trading with a trailing P/E of 96.9x, which is higher than the industry average of 13.9x. 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. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View our latest analysis for Swiss Re
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 SREN
Price-Earnings Ratio = Price per share ÷ Earnings per share
SREN Price-Earnings Ratio = $99.96 ÷ $1.032 = 96.9x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SREN, 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. SREN’s P/E of 96.9x is higher than its industry peers (13.9x), which implies that each dollar of SREN’s earnings is being overvalued by investors. As such, our analysis shows that SREN represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your SREN shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to SREN. 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 SREN, 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 SREN to are fairly valued by the market. If this is violated, SREN’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on SREN, 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SREN’s future growth? Take a look at our free research report of analyst consensus for SREN’s outlook.
Past Track Record: Has SREN 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 SREN’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.
