Should You Be Tempted To Sell Nemetschek SE (ETR:NEM) Because Of Its PE Ratio?
Nemetschek SE (XTRA:NEM) is currently trading at a trailing P/E of 64.1x, which is higher than the industry average of 36.6x. While this makes NEM 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. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Nemetschek
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in 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 NEM
Price-Earnings Ratio = Price per share ÷ Earnings per share
NEM Price-Earnings Ratio = €89 ÷ €1.39 = 64.1x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to NEM, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. NEM’s P/E of 64.1x is higher than its industry peers (36.6x), which implies that each dollar of NEM’s earnings is being overvalued by investors. Therefore, according to this analysis, NEM is an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your NEM shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to NEM. 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 NEM, 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 NEM to are fairly valued by the market. If this does not hold, there is a possibility that NEM’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.
