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# Should You Be Tempted To Sell Piraeus Port Authority SA (ATH:PPA) Because Of Its PE Ratio?

This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between Piraeus Port Authority SA (ATH:PPA)’s fundamentals and stock market performance.

Piraeus Port Authority SA (ATH:PPA) is currently trading at a trailing P/E of 37.4x, which is higher than the industry average of 18.5x. While PPA 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio.

### Breaking down the Price-Earnings ratio

P/E is often used for relative valuation since earnings power is a chief driver of investment value. 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 PPA

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

PPA Price-Earnings Ratio = €16.88 ÷ €0.452 = 37.4x

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 want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as PPA, 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. At 37.4x, PPA’s P/E is higher than its industry peers (18x). This implies that investors are overvaluing each dollar of PPA’s earnings. Therefore, according to this analysis, PPA is an over-priced stock.

### A few caveats

However, before you rush out to sell your PPA shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to PPA, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with PPA, 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 PPA to are fairly valued by the market. If this is violated, PPA’s P/E may be lower than its peers as they are actually overvalued by investors.

### What this means for you:

Since you may have already conducted your due diligence on PPA, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined 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 urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for PPA’s future growth? Take a look at our free research report of analyst consensus for PPA’s outlook.
2. Past Track Record: Has PPA 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 PPA’s historicals for more clarity.
3. 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.