Is It Time To Sell B&M European Value Retail SA (LSE:BME) Based Off Its PE Ratio?
B&M European Value Retail SA (LSE:BME) is trading with a trailing P/E of 26.9x, which is higher than the industry average of 20.5x. While BME 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. In this article, 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 BME
What you need to know about 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 pound of the company’s earnings.
P/E Calculation for BME
Price-Earnings Ratio = Price per share ÷ Earnings per share
BME Price-Earnings Ratio = 3.85 ÷ 0.143 = 26.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to BME, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. At 26.9x, BME’s P/E is higher than its industry peers (20.5x). This implies that investors are overvaluing each dollar of BME’s earnings. Therefore, according to this analysis, BME is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your BME shares immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to BME, or else the difference in P/E might be a result of other factors. For example, if you compared lower risk firms with BME, 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 BME to are fairly valued by the market. If this is violated, BME's P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Are you a shareholder? If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in BME. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above.
Are you a potential investor? If you are considering investing in BME, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on B&M European Value Retail S.A for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
