Should You Be Tempted To Sell Savaria Corporation (TSE:SIS) Because Of Its PE Ratio?
Savaria Corporation (TSX:SIS) is trading with a trailing P/E of 35.6x, which is higher than the industry average of 24.4x. While SIS 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for Savaria
Breaking down the Price-Earnings ratio
A common ratio used for relative valuation is the P/E ratio. 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 SIS
Price-Earnings Ratio = Price per share ÷ Earnings per share
SIS Price-Earnings Ratio = CA$17.25 ÷ CA$0.485 = 35.6x
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. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to SIS, 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. Since SIS’s P/E of 35.6x is higher than its industry peers (24.4x), it means that investors are paying more than they should for each dollar of SIS’s earnings. Therefore, according to this analysis, SIS is an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your SIS 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 SIS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with SIS, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing SIS to are fairly valued by the market. If this is violated, SIS’s P/E may be lower than its peers as they are actually overvalued by investors.
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.
