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Should You Be Tempted To Sell Agencja Rozwoju Innowacji Spólka Akcyjna (WSE:ARI) Because Of Its PE Ratio?

Agencja Rozwoju Innowacji Spólka Akcyjna (WSE:ARI) is currently trading at a trailing P/E of 162.5x, which is higher than the industry average of 13.5x. While ARI 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. Check out our latest analysis for Agencja Rozwoju Innowacji Spólka Akcyjna

Demystifying the P/E ratio

WSE:ARI PE PEG Gauge Mar 16th 18
WSE:ARI PE PEG Gauge Mar 16th 18

P/E is a popular ratio used for 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 ARI

Price-Earnings Ratio = Price per share ÷ Earnings per share

ARI Price-Earnings Ratio = PLN0.22 ÷ PLN0.001 = 162.5x

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 ARI, 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. ARI’s P/E of 162.5x is higher than its industry peers (13.5x), which implies that each dollar of ARI’s earnings is being overvalued by investors. Therefore, according to this analysis, ARI is an over-priced stock.

Assumptions to be aware of

Before you jump to the conclusion that ARI should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to ARI. 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 ARI, 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 ARI to are fairly valued by the market. If this does not hold, there is a possibility that ARI’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.

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