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Tantech Holdings Ltd (NASDAQ:TANH) is currently trading at a trailing P/E of 36.2x, which is higher than the industry average of 19.6x. While this makes TANH 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. Today, 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 Tantech Holdings
What you need to know about the P/E 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 TANH
Price-Earnings Ratio = Price per share ÷ Earnings per share
TANH Price-Earnings Ratio = $2.54 ÷ $0.07 = 36.2x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful 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 TANH, 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 TANH’s P/E of 36.2x is higher than its industry peers (19.6x), it means that investors are paying more than they should for each dollar of TANH’s earnings. As such, our analysis shows that TANH represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your TANH 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 TANH, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TANH, 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 TANH to are fairly valued by the market. If this does not hold true, TANH’s lower P/E ratio may be because firms in our peer group are 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.