Should You Be Tempted To Sell Wilson ASA (OB:WILS) At Its Current PE Ratio?
Wilson ASA (OB:WILS) is currently trading at a trailing P/E of 16.8x, which is higher than the industry average of 9.4x. While this makes WILS 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Wilson
Demystifying the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 WILS
Price-Earnings Ratio = Price per share ÷ Earnings per share
WILS Price-Earnings Ratio = €1.53 ÷ €0.091 = 16.8x
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 WILS, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since WILS’s P/E of 16.8x is higher than its industry peers (9.4x), it means that investors are paying more than they should for each dollar of WILS’s earnings. As such, our analysis shows that WILS represents an over-priced stock.
Assumptions to be aware of
However, before you rush out to sell your WILS 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 WILS, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with WILS, 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 WILS to are fairly valued by the market. If this does not hold, there is a possibility that WILS’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.
