Euro Tech Holdings Company Limited (NASDAQ:CLWT) trades with a trailing P/E of 18x, which is higher than the industry average of 14.4x. While this makes CLWT 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. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for Euro Tech Holdings
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 CLWT
Price-Earnings Ratio = Price per share ÷ Earnings per share
CLWT Price-Earnings Ratio = $4.14 ÷ $0.229 = 18x
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 CLWT, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 18x, CLWT’s P/E is higher than its industry peers (14.4x). This implies that investors are overvaluing each dollar of CLWT’s earnings. As such, our analysis shows that CLWT represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your CLWT shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to CLWT, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CLWT, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CLWT to are fairly valued by the market. If this is violated, CLWT’s P/E may be lower than its peers as they are actually overvalued by investors.
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 CLWT. 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:
- Financial Health: Is CLWT’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Past Track Record: Has CLWT 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 CLWT’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.