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Hapag-Lloyd Aktiengesellschaft (DB:HLAG) is currently trading at a trailing P/E of 89.7x, which is higher than the industry average of 14.2x. 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 explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for Hapag-Lloyd
Breaking down the P/E ratio
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 HLAG
Price-Earnings Ratio = Price per share ÷ Earnings per share
HLAG Price-Earnings Ratio = €30.38 ÷ €0.339 = 89.7x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to HLAG, 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. HLAG’s P/E of 89.7x is higher than its industry peers (14.2x), which implies that each dollar of HLAG’s earnings is being overvalued by investors. As such, our analysis shows that HLAG represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your HLAG 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 HLAG. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared higher growth firms with HLAG, 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 HLAG to are fairly valued by the market. If this does not hold, there is a possibility that HLAG’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.