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This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Tootsie Roll Industries Inc (NYSE:TR).
Tootsie Roll Industries Inc (NYSE:TR) is currently trading at a trailing P/E of 25.3x, which is higher than the industry average of 19.5x. 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 break down what the P/E ratio is, how to interpret it and what to watch out for. View out our latest analysis for Tootsie Roll Industries
Breaking down the P/E 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 TR
Price-Earnings Ratio = Price per share ÷ Earnings per share
TR Price-Earnings Ratio = $30.85 ÷ $1.218 = 25.3x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as TR, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 25.3x, TR’s P/E is higher than its industry peers (19.5x). This implies that investors are overvaluing each dollar of TR’s earnings. As such, our analysis shows that TR represents an over-priced stock.
A few caveats
Before you jump to the conclusion that TR should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to TR, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with TR, 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 TR to are fairly valued by the market. If this is violated, TR’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to TR. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. 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:
Future Outlook: What are well-informed industry analysts predicting for TR’s future growth? Take a look at our free research report of analyst consensus for TR’s outlook.
Past Track Record: Has TR 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 TR’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.