Is It Time To Sell Clinuvel Pharmaceuticals Limited (ASX:CUV) Based Off Its PE Ratio?
Clinuvel Pharmaceuticals Limited (ASX:CUV) is currently trading at a trailing P/E of 78.9x, which is higher than the industry average of 28x. While CUV 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 explain what the P/E ratio is as well as what you should look out for when using it. See our latest analysis for Clinuvel Pharmaceuticals
Breaking down the Price-Earnings 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 CUV
Price-Earnings Ratio = Price per share ÷ Earnings per share
CUV Price-Earnings Ratio = A$10.04 ÷ A$0.127 = 78.9x
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 CUV, 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. CUV’s P/E of 78.9x is higher than its industry peers (28x), which implies that each dollar of CUV’s earnings is being overvalued by investors. As such, our analysis shows that CUV represents an over-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to sell your CUV shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CUV. 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 CUV, 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 CUV to are fairly valued by the market. If this does not hold true, CUV’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.
