In This Article:
I am writing today to help inform people who are new to the stock market and want to begin learning about how to value company based on its current earnings and what are the drawbacks of this method.
Compagnie des Alpes SA (EPA:CDA) trades with a trailing P/E of 17.7x, which is lower than the industry average of 27.9x. While CDA might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for.
View our latest analysis for Compagnie des Alpes
What you need to know about 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 CDA
Price-Earnings Ratio = Price per share ÷ Earnings per share
CDA Price-Earnings Ratio = €28.8 ÷ €1.629 = 17.7x
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 CDA, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 17.7x, CDA’s P/E is lower than its industry peers (27.9x). This implies that investors are undervaluing each dollar of CDA’s earnings. This multiple is a median of profitable companies of 11 Hospitality companies in FR including Groupe Partouche, Société Fermière du Casino Municipal de Cannes and Société Française de Casinos Société Anonyme. As such, our analysis shows that CDA represents an under-priced stock.
Assumptions to watch out for
While our conclusion might prompt you to buy CDA immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to CDA. 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 CDA, 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 CDA to are fairly valued by the market. If this does not hold true, CDA’s lower P/E ratio may be because firms in our peer group are overvalued by the market.