Ambromobiliare Sp.A. (BIT:AMB) trades with a trailing P/E of 34.8x, which is higher than the industry average of 15.8x. 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. Today, 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 Ambromobiliare
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in 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 AMB
Price-Earnings Ratio = Price per share ÷ Earnings per share
AMB Price-Earnings Ratio = €3.69 ÷ €0.106 = 34.8x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to AMB, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. AMB’s P/E of 34.8x is higher than its industry peers (15.8x), which implies that each dollar of AMB’s earnings is being overvalued by investors. As such, our analysis shows that AMB represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your AMB shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to AMB. 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 AMB, 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 AMB to are fairly valued by the market. If this does not hold, there is a possibility that AMB’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.