Should You Be Tempted To Sell Juventus Football Club Sp.A. (BIT:JUVE) Because Of Its PE Ratio?
Juventus Football Club Sp.A. (BIT:JUVE) trades with a trailing P/E of 49.6x, which is higher than the industry average of 22x. 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 Juventus Football Club
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 JUVE
Price-Earnings Ratio = Price per share ÷ Earnings per share
JUVE Price-Earnings Ratio = €0.62 ÷ €0.013 = 49.6x
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 JUVE, 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. Since JUVE’s P/E of 49.6x is higher than its industry peers (22x), it means that investors are paying more than they should for each dollar of JUVE’s earnings. Therefore, according to this analysis, JUVE is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your JUVE shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to JUVE, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with JUVE, 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 JUVE to are fairly valued by the market. If this does not hold, there is a possibility that JUVE’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in JUVE. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for JUVE’s future growth? Take a look at our free research report of analyst consensus for JUVE’s outlook.
Past Track Record: Has JUVE 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 JUVE’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.
