The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Green Plains Inc (NASDAQ:GPRE)’s fundamentals and stock market performance.
Green Plains Inc (NASDAQ:GPRE) trades with a trailing P/E of 20.1x, which is higher than the industry average of 13.4x. While GPRE 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. View out our latest analysis for Green Plains
Breaking down the P/E ratio
P/E is a popular ratio used for relative valuation. 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 GPRE
Price-Earnings Ratio = Price per share ÷ Earnings per share
GPRE Price-Earnings Ratio = $20.5 ÷ $1.022 = 20.1x
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 GPRE, 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. GPRE’s P/E of 20.1x is higher than its industry peers (13.4x), which implies that each dollar of GPRE’s earnings is being overvalued by investors. Therefore, according to this analysis, GPRE is an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your GPRE shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to GPRE. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with GPRE, 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 GPRE to are fairly valued by the market. If this does not hold, there is a possibility that GPRE’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Since you may have already conducted your due diligence on GPRE, the overvaluation of the stock may mean it is a good time to reduce your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. 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 highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for GPRE’s future growth? Take a look at our free research report of analyst consensus for GPRE’s outlook.
- Past Track Record: Has GPRE 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 GPRE’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.